Basic questions on indicators

1. Which indicators indicate "market noise" vs trending.

2. ATR is the daily range. What do I use for the maximum excursion? Recent market movement has exploded the ATR, but in some cases the max excursion does not seem to have increased that much.

Thanks

 

Problem is, there ain't no noise. It's ALL signal.

 

1) On a larger timescale, some people use fractal/hurst exponent to define periods of trending/trading. Although like a lot of TA, it only tells you something after the fact.

Bollinger bands are one way to characterize noise and volatility, whereby the signal is the price average and the noise is characterized by excursions that are statistically bound by +/- 3sigma bands.


2) You have to define what your max excursion you are looking for is relative to.

You could define a variation of TR, to include absolute max range between yesterdays H- today's L and today's H- yesterday's L, that is slightly wider than the standard TR defintion. That would give max range between two periods (where 1 period = day).

Then to find the excursion max, you could take the mean of the new range you just defined and subtract min and max for each data pt. to get pk. excursion in either direction for 2 day period.*

Note that ATR is just what it says, it is an "average" of TR. That filters a lot of the noise or excursion (variance) information. To go backwards and get pk excursions, you need to eliminate the averaging function.

Also, notice you said "some cases" max excursion is small, while ATR is extreme. Again, that is because ATR is an average of many cases-- the smaller swings you are seeing will eventually be reflected in the ATR if they persist, as the "average" will take these reduced swings into consideration, and over time it will decrease to reflect this.

 

I built one once that compared range over a period average range (not true) over the same period. Does a good job of showing how trendy a market is (movement divided by noise). You can also choose your "trendiness period" with this approach.

 

Same thing is in Perry Kaufman's boook Smarter Trading. He calls it the Efficiency Ratio. Have a look at the Google Books archive of that specific page: http://tinyurl.com/2mj5nv (last paragraph)

 

Thanks very much for the response. Actually I do market neutral strategies and looking for an indicator of non-trending markets.

I make money on noise!