CMI - an indicator of market volatility
Each of us faced the problem that when there is a trend, all strategies work like clockwork, but when the sawtooth up-down movement begins, even good, proven ones forex trading strategies suffer losses. So how do you determine when you should not go into the market? This will help us CMI (Choppy Market Index) - market volatility indicator.
CMI is a simple indicator that calculates the difference between closing the last (currently) bar and closing N bars back, and then divides this value by the difference between the highest HIGH and the lowest LOW among these bars. The resulting number is multiplied by 100 to give a visual display of the "instability" of the market in the range from 1 to 100.
The indicator, as well as a strategy based on it (see below) was invented by Daniel Fernandez, material on trading with CMI was published in the August issue of Currency Trader magazine.
The indicator is set just like any other, if you have difficulties, see How to install the indicator in MT4. After attaching the CMI to the chart (timeframe and pair of your choice), we get a similar picture:
As many have already guessed, the lower the indicator value, the more unstable the market. And the higher its value, the more clearly the presence of a trend. The tipping point (i.e. when it can be said that the trend has changed to an incomprehensible movement and vice versa) approximately corresponds to level 50.
The author also offers us a strategy based on the CMI indicator for trading on daily charts. Interestingly, 2 sets of rules are proposed: for trading in an unstable market and for trading in the presence of a trend.
CMI Strategy Rules
Trading in an Unstable Market
1. We buy when the moving average (blue line) of the CMI indicator is below 40 and the line of the CMI itself is red.
2. We sell when the moving average (blue line) of the CMI indicator is below 40 and the line of the CMI itself is green.
3. We exit the position when the CMI exceeds 50.
Trading in the trending market
1. We buy when the blue moving average is above 60 and the color of the CMI line is green.
2. We sell when the blue moving average is above 60 and the color of the CMI line is red.
3. We exit the position when the CMI falls below 50.
I would not advise trading with the above strategy, it is rather given to understand the operation of the CMI indicator, as well as its possible application for filtering signals according to trend following strategies.
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