TL;DR. The sum of n true ranges compared with the n-bar high-low range, on a log scale from 0 to 100. Near 100 the bars went back and forth inside a narrow range; low readings mean the bars' travel went into net progress. 61.8 and 38.2 are the usual lines.
What it measures
- Trending or ranging, not which way. CHOP has no direction. A strong rally and a strong sell-off both read low.
- Efficiency of movement. If every bar adds to the move, the true ranges add up to about the window's range and CHOP is low. If the bars overlap, their ranges add up to many times the window's range and CHOP is high.
- A filter for the strategy type. Trend rules for low readings, range rules for high ones.
Formula
Inputs in AlgoLift
| Setting | Default | Range | Notes |
|---|---|---|---|
| Period | 14 | 2 to 500 | The bars the true ranges are summed over and the high-low range is taken across. |
| ATR Period | 1 | 1 to 500 | The ATR summed in place of each bar's true range; 1 sums the true ranges themselves. |
Outputs in AlgoLift
| Handle | Type | Plotted | Notes |
|---|---|---|---|
| CHOP | Numeric | Always | The choppiness, from 0 (trending) to 100 (choppy), in its own panel with guides at 38.2 and 61.8. Empty where the n-bar range is 0. |
How to read it
- Above 61.8: the market is chopping. Bars overlap and price is going nowhere fast.
- Below 38.2: the bars are moving in one direction; a trend is underway.
- Falling from a high reading: a range is starting to resolve. Breakout traders watch this move.
- Rising from a low reading: a trend is losing its efficiency, often before price itself turns.
Best in, worst in
Best in deciding when to run which rule: turning a trend strategy off in chop, or a range strategy off in a trend.
Worst in timing entries on its own. It says what kind of market it is, never where to enter.
Three setups
1. Trend rules only when it trends
AND a trend entry (for example a Crossover of two averages) with a Comparison: CHOP less than 38.2. The crossover is ignored while the market chops.
2. Range rules only when it chops
Gate a mean-reversion entry, such as an RSI extreme, with CHOP greater than 61.8.
3. Breakout from a squeeze
Wait for CHOP above 61.8 within the last bars, then enter on a close beyond the Donchian Channels upper band while CHOP falls.
Common mistakes
- Treating 61.8 and 38.2 as exact. They are conventions. Sweep the threshold and check that nearby values behave alike (overfitting in trading).
- Using a long period on short tests. CHOP over 100 bars changes slowly and gates very little.
- Expecting a value on a frozen market. A window with no range has no reading.
CHOP says whether the bars are trending or chopping, never which way: a gate for choosing between trend and range rules.