Motion Smoothness Index

Introduction

Its holiday time for me, i have been working here a lot. But no leaving before publishing. Telling when market price is smooth or rough is not the easiest task, so today i present a trend metric indicator that allow you to give you this kind of information.

The Indicator

The indicator is in an approximate range of (0,1) with mean x̄ decaying for higher length's, when the indicator is below 0.5 the market is smooth, else rough, this is the simple interpretation. The indicator is simply the ratio of the price residual standard deviation and the price standard deviation.

Higher value of length will make the indicator less accurate when it comes to detect rough market price, you can still use the indicator direction or its running mean to give you insights but 0.5 is still the recommended detection threshold.

In More Depth

Even tho market is random by nature there can still be structures in the price (cycles and trends), the fractional BM model will tell you that market price is sometimes auto-correlated (trending) or non auto-correlated (ranging), knowing what is the current market state is therefore important, when price is rough it can means an excess in noise thus exhibiting an uncorrelated market at the contrary of a smoother price that can allow for auto-correlation.

Now, market is infected by noise, and thats really unfortunate but the noise posses various properties that can allow for all the structures we see in market price. So thinking about the market allowing for possible profits during auto-correlated states is encouraging.

Conclusion

Although the indicator measure smoothness/roughness it can still be interpreted as a trend/range state detector. I hope it provide to be useful.

I wish you all good holidays and see you next time ! Thanks for reading !