From time to time, user may want to adjust the Market Activity Index setting for different currency pairs. Here is brief explanation to each input variable:
- Use White Background Chart: true or false only
- Calculation Period: period to calculate Market Activity Index
- Average Period: period to smooth out Market Activity Index
- Use Weighted Average: true or false only (weighed average is more responsive than non weighted average)
- Index Critical Level value: Critical level 0.05 or 0.1
- Index Critical Level Width: line width of Critical level
- Index Critical Level Color: line color of Critical level
The Market Activity Index is designed to oscillate between 0.0 and 1.0 theoretically. Level 0.0 indicate theoretically dead quite period and Level 1.0 indicates theoretically maximum volatility. However both 0.0 and 1.0 will never reach in practice. Instead, use can choose 0.05 or 0.1 to detect sideways or low volatility period. Level 0.05 or 0.1 also corresponds to the common 95% or 90% critical value used in statistical hypothesis testing. Also the similar practical consideration as in the statistical hypothesis testing can be applied to the operation of Market Activity Index. According to our observations, some currency pairs works better with 0.05 critical value and for some other currency pairs, 0.1 critical value works better. Choice of critical value should be made accordingly to the price data itself.
Practical Consideration with Market Activity Index
Market Activity Index can be best used to spot the quite period of the market, which is also called sideways market or low volatile market in some text book. In practice, this quite period is followed by highly volatile period in cyclic manner. The indicator itself represents the alternating picture of the market movement in the quantitative form. This indicator can successfully spot the start of high volatile market period. As this technical indicator oscillates between fixed value 0.0 and 1.0, this indicators is suitable to build trading rules when combined together with other technical indicators. In spite of the fact that Market Activity Index often spot the turning point accurately, the Market Activity Index is not meant to predict the market direction from its design stage. Therefore, this indicator is best used as the supplementary tool to other technical indicators if your trading strategy requires knowing the market direction.
In trading it is important to make good decision but it is also important when to rest. Unlike ATR or Standard deviation indicator, Market Activity Index oscillate between 0.0 and 1.0. Therefore you could use this as your trading alarm. In our opinion, it is also more accurate than ADX in terms of filtering out quite market. Simply speaking, rest your trading when the Market Activity is pretty low like below 0.05 or below 0.10 since market will not move much during this time.