A choppy market is when an asset’s price shows no clear trend but instead experiences many smaller fluctuations.
A choppy market can occur when buyers and sellers of a market are at an equilibrium. If there is high liquidity (large trading volumes) in a market and neither bears nor bulls can dominate, the result is often a choppy market.
Choppy markets are associated with rectangular price ranges. A rectangular price range is a pattern that occurs on charts that continuously hits the same support (the lower limit) and resistance (the upper limit) levels. This prevents the market from breaking out into a trend, as its price is instead confined between these two levels – creating a rectangle.
Traders often look to profit from price trends, so can find it difficult to successfully trade a choppy market. Those who do trade choppy markets to try take advantage of small price movements over a short-term period, but more volatile markets are likely to present greater opportunities for most traders.
What are good technical indicators for choppy markets?
A good technical indicator to use to identify choppy markets is the Average Directional Index (ADX). The ADX indicator will not only help to identify whether a market is experiencing a price trend, but it will also show the strength of the trend.
The main characteristic of a choppy market is that there is little or no trend, so in this case we can use the ADX indicator to identify the strength of a trend in a market. If it indicates there’s no trend, we know a market is choppy and can trade accordingly.
The ADX works by using the positive (+DI) and negative (-DI) direction indicator to help traders determine whether they should go long or short on a market based on the direction and strength of the trend. When the ADX is above 25, this shows that the trend is strong. If the ADX is below 20, this implies a non-existent trend – at which point a choppy market has been identified.