How Do I Avoid the Chop Chop?

[jeffx 10]

Here's a good way to determine chop, any time frame

 

Note that this works great on FX, although the trader who taught me this trades just about everything that moves.

 

Fib retracements - do fib retracements between most recent significant swing highs/lows, in both directions (1 retracement up, 1 down) If price is moving between .786's, you're definitely in chop.

 

CCI works GREAT, if used properly. It is NOT an oscillator like a stochastic, it is much more of a momentum indicator. If it's staying OB/OS, that's a great indication that you are in a trend, or momentum is in that direction.

 

Try this -- throw a 50 period CCI on your chart. Above 0 = uptrend bias, below 0 line = downtrend bias. Watch what happens to price when the CCI breaks the 0 line, and especially when it breaks the 100/-100 lines. You are NOT looking for a reversal if CCI breaks below 100 or above -100 lines, that is only an exit indication.

 

Lastly, if the CCI 50 is just bouncing between 0 and 100 or 0 and -100, without breaking a "line", that is another good indication of chop.

 

Is it perfect? No! Will it give some false signals? Yes! But I've found no other indicator that is more accurate. For more info, google CCI Dr. Bob (free info) and you'll also find some great setups with CCI. This is NOT the way Woodie teaches it, it's much better IMO.

[waveslider 10]

ZDO -

thanks for that post. Agree with you about Ross hook (though I had not tested it, figured it wouldn't work so well unless obvious momentum conditions). Also agree with you about JMA, which I use. I also use a short term JMA to help identify waves.

[zdo 20]

waveslider,

 

re: "I also use a short term JMA to help identify waves" a fast noLagMA or jtHMA might work slightly better for identifying waves than JMA - mostly a matter of taste though...

[BlowFish 10]

ZDO -

thanks for that post. Agree with you about Ross hook (though I had not tested it, figured it wouldn't work so well unless obvious momentum conditions). Also agree with you about JMA, which I use. I also use a short term JMA to help identify waves.

 

Ross Hook's will often trigger a traders trick entry but fail if it is actually a two legged correction. As you say momentum is often a good clue that you are only in for a short single leg correction.

[legout 10]

Identify the range, and wait for a breakout? Trade the first pullback in new direction? Or anticipate which direction and get in at the opposite side of range?

 

legout

[Jabo22 10]

For trend trading , I use tend channels and market structure at a higher timeframe.

Higher HIghs/Higher Lows =UP trend, Lower HIghs/Lower Lows = Down Trend. The 10 minute chart is my favorite and I use the 60 min trend line/channel and market structure off the 60 minute to keep me with the trend. Climactic or ending price/volume action usually leads to chop or balance or ranging. To be honest, I use pit noise Traders Audio for the S&P pit and when Ben calls "choppy trade" or "Local to Local" trading, you know its chopping around and it's dead nuts on.

[david22 10]

try using market internals like advancers vs decliners,

up volume vs down volume, tick, trin etc..

[stemmons_10 10]

A squeeze can fire with various underlying price structures. It's not always a simple breakout of a consolidation range. So decide what price structure you are looking for to get you in a trade.

 

If your timeframe is also determined, then you should be able to see 'chop chop' without another indicator. Determine what constitutes a swing high or low for you and the chop comes about when a new high or new low isn't being made.

 

90% of the answers posted to your question are over-engineered. If you can't look at a chart and know when you're in chop, then you're either in denial or blind. Chop is simple. Keep it that way.

 

Keep Trading.

 

JScott

[chubbardo 10]

Couple of ways to avoid the chop... time of day... looking at your chart the chop is in the dead zone (lunch time). you could filter this by not taking any new trades after 11am assuming you're in the USA.

 

Another option is to follow price action. An uptrend is defined as a series of Higher Highs (HH) and Higher Lows (HL) swing points. A swing point is where the bar before and after is less than the middle bar. marked the sequence on your chart. You can see the price stalling when it doesn't make a Higher Low (HL). It makes a LL instead. For a change of trend you need to see a LH followed by a LL. We dont get a HH but an equal high. Clue 1 you are in a range. Price makes a LL then a LH. To confirm the trend direction change we need to see another LL. Instead we get a HH and LH. At this stage there is no trend and you are in a range. Mark up the support and resistance as you have with the box and look for a break out of this.

 

Hope that helps.

Edited July 2, 2009 by chubbardo

[Jam 10]

Use your large triggers as a filter, two ways to do that, when you are above them and they are strong, only take long signals, or you can back test and take signals on the wrong side of them as long as they are still strong in your direction.

 

When the large triggs are flat or price is in a range stay out until large triggs start to move again then look for signals in that direction only. This should help avoid the whips. Remember, no trade is a good trade when the market is whippy.

 

Also, try using another stop method that is different, I have incorporated a simple Parabolic SAR for stops only and adjusted my settings to afstep .02 and AFlimit .1 this keeps me in trades a little longer. You will still need an initial stop until price changes the Par Sar and then you can trail. I also use candlestix and if the price bar that caused a change in the par sar direction closes back in the trade direction then I trail the price bar by 2 ticks otherwise I exit if the price bar shows reversal.

 

Hope this helps

 

 

Jim

[Uli Schmuli 10]

CCI works GREAT, if used properly. It is NOT an oscillator like a stochastic, it is much more of a momentum indicator. If it's staying OB/OS, that's a great indication that you are in a trend, or momentum is in that direction.

 

Jeffx,

I really liked your post about using CCI to determine chop. I just wanted to add that if one has determined that the market is in consolidation (chop) then the CCI becomes non-relevant. CCI readings on breakouts will often very suddenly exceed |150|

 

Uli

[ajax358 10]

Here's a good way to determine chop, any time frame

 

Note that this works great on FX, although the trader who taught me this trades just about everything that moves.

 

Fib retracements - do fib retracements between most recent significant swing highs/lows, in both directions (1 retracement up, 1 down) If price is moving between .786's, you're definitely in chop.

 

CCI works GREAT, if used properly. It is NOT an oscillator like a stochastic, it is much more of a momentum indicator. If it's staying OB/OS, that's a great indication that you are in a trend, or momentum is in that direction.

 

Try this -- throw a 50 period CCI on your chart. Above 0 = uptrend bias, below 0 line = downtrend bias. Watch what happens to price when the CCI breaks the 0 line, and especially when it breaks the 100/-100 lines. You are NOT looking for a reversal if CCI breaks below 100 or above -100 lines, that is only an exit indication.

 

Lastly, if the CCI 50 is just bouncing between 0 and 100 or 0 and -100, without breaking a "line", that is another good indication of chop.

 

Is it perfect? No! Will it give some false signals? Yes! But I've found no other indicator that is more accurate. For more info, google CCI Dr. Bob (free info) and you'll also find some great setups with CCI. This is NOT the way Woodie teaches it, it's much better IMO.

 

 

yes I agree!! Been using a 55 CCI for 5 yrears, as a Trend turn indicator, wokrs great!! I use '55' rathter than your '50', cuz it is a Fib #, & all my inputs are in Fib ratios....so keep the commonality going. Try both & see which is best on your charts. Good idea mate....

 

ajax

[bathrobe 10]

The latest issue of Futures magazine has a wonderful article by Al Brooks about trading treasuries using price action. In the article he explains how to avoid what he calls "barb wire", which is the same as chop. In the article (page 28) he refers to barb wire as a bar with 50% or more of the bar overlapped by the bars immediately before and after.

 

This is a quick, 3-bar way to identify chop, and breakout strategies could be applied as a simple way to trade, I think more confirmation would be in order to take a breakout trade, but this is a start along with the other ideas earlier in the thread.

[Gabe2004 10]

The latest issue of Futures magazine has a wonderful article by Al Brooks about trading treasuries using price action. In the article he explains how to avoid what he calls "barb wire", which is the same as chop. In the article (page 28) he refers to barb wire as a bar with 50% or more of the bar overlapped by the bars immediately before and after.

 

This is a quick, 3-bar way to identify chop, and breakout strategies could be applied as a simple way to trade, I think more confirmation would be in order to take a breakout trade, but this is a start along with the other ideas earlier in the thread.

 

I ran some stats on SPY (ES) in 1 min and 5 min time frames.

About 75% of 3 bar combinations have an overlap between the 1st and 3rd bar of about 55% - i.e. bar 3 overlaps 55% of bar 1 (high to low).

So if we take the average occurance , 75% of the market is in a Barb Wire state.

[ClearlyTechnical 10]

I came up with a way that will keep you out of chop 100% of the time. This is not an exaggeration.

 

Most of all it's extremely simple and even a non-trader can understand the logic.

 

Here it is.

 

Do NOT trade.

 

Now you might say, this is nonsense, but it makes about as much sense as I have read from the posters in this thread.

 

I am not looking to discount what they are saying, but really, when you break it down, indicators are nothing more than a rear view mirror. Everything is always clear in a screenshot with the pretty lines drawn. It's all so easy to grasp. But the fact is, it is NOT that simple. So here is my contribution to this thread as my first post.

 

IF YOU WANT TO AVOID CHOP, DO NOT TRADE!

 

Otherwise, use good common sense.

 

Don't trade lunch, it's not worth it if you are trying to avoid chop.

 

Don't trade low volume days or pre-market, it is not worth it if you want to avoid chop.

 

Don't trade before major news, wait for it to take direction, then get on.

 

If you want to avoid chop, then think of trading as "envelopes" of opportunity. When an envelope reveals itself, get on, get paid, get off. Then turn off your computer and leave.

 

If you ask 90% of the traders that post to this board, if they could find 1 trade per day to take 6 ticks out the ES, with a high chance of success (including commisions and spread) they would say yes. The problem is people try to take more than that, and are often upset about what they didn't get. Just as it makes no sense to kick yourself for not getting long when you were 8 years old (think of how much you would have made), it makes no sense kicking yourself for what could have been.

 

People who want to avoid chop, are really saying, I want to be in the market all the time, except when it's choppy, lol. Do you hear yourselves? You see those pretty trends that clearly show themselves after an MA crossover and you lick your chops saying, if I only bought here and sold here when the crossovers occurred, I would clean up. And guess what, that's like the carnival where they have the guy with the basketball hoops behind him. Make one basket and win a prize, the problem is that you face the basket head on and you fail to see that it is really an oval and not a circle, but you give him your 5.00 for 3 balls anyway and say "man, I was right there".

 

Welcome the the game my friends, you can't get the easy MA crossover/crossunder money without going through the chop. Sure you can avoid some just by doing what I said, but beware of those who show you a few screenshots and how it all worked out. Take what they told you, backtest it, and you will see that over months, THEY ALWAYS LOSE MONEY. Yes, ALWAYS. (I'm not talking about a curve fitted version, rather random dates pulled from a hat over say 5 years.)

 

What they don't tell you is what else they are looking at. It's called instinct and experience and "knowing" something isn't right. The rest are guides, but can absolutely not give you any insight as to what will happen next, only what MIGHT happen next. And hence.... CHOP! In other words, they draw everything they are telling you about, but oh, that one didn't complete, so I got flat. They they wait longer, draw new lines, oh that didn't follow through, so I got flat.

 

CHOP is trading. Instead of thinking about how to AVOID chop, think about how to FIND chop and play from the MOVE that COMES OUT OF IT! COPY??

 

That is the secret. Just like the poster who talked about the lie of the ADX and that you are best served getting on the train under a reading of 20, rather than after. I say the same for CHOP. DO NOT SEEK TO AVOID CHOP, SEEK TO SEE CHOP, then LOOK FOR THE MOVE COMING OUT! That is FAR EASIER to do than to detect it before it happens.

 

What you should be spending the most amount of time on is your money / risk management. You would be better served doing the following, rather than trying to predict chop.

 

1. Get a coin and flip it. Head get long, tails get short

2. Set a fixed amount of risk, stick to it.

3. Wager an amount that is a fixed amount of your capital that will allow you to go 20 turns.

4. Set your stops to the high/low of the prior candle.

5. Do the same on each new candle

 

Repeat.

 

You will outperform any always in MA crossover/under even with the best of indicators.

 

Don't believe me? Try it. You'll see.

 

To increase your odds, flip coin, if get short, then only do so if the market is red and trading under a 50MA. And the opposite going long.

 

Try that and focus on trying to just do 20 trades without changing a beat. That will be your biggest obsticle, not finding the trades. DO THIS FIRST BEFORE DOING ANYTHING ELSE. It is more important than chop.

 

See, the major problem with indicators in real time, is that you can't see the next 10 bars, so you struggle with trying to trust them and when a move is going against you, you will question the signal and say maybe this is where the ADX toplines, or maybe the CCI is blah, or the Stochs are blah, or or or, tick trin, in out, up down, blah blah.

 

KEEP IT SIMPLE

 

You like the MA crossover-under? Fine, then just take 2 trades per day in the morning and FORGET THE REST OF THE DAY. IF YOU START TO MAKE MONEY CONSISTENTLY! then trade after 2:30pm, and BE CAREFUL AT 3PM, that is where the traders like to take out their frustration, lol.

 

If you catch the MA cross in the morning, ride it using the HL and HH of that move and get out when your indicators compress (this is where you would use them if you want). ADX is running in the 45 range, start to tighten your stop. Also, look at the divergence betwen your MA's, what is the standard deviation? if they expand really far, maybe you should tighten your stop.

 

Do you need to make the whole move? You may disagree with me about indicators, but if you really trade with real money and do it to pay your rent/mortgage, then you know what I am saying is the truth, even if you don't agree.