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Academy > Technical Analysis > What is Chop Zone: Discover Whether the Market Is Going Sideways >

What is Chop Zone: Discover Whether the Market Is Going Sideways

2022-03-28 11:20:26

Summary:

  • A trending market means that the price is going in one direction. If Bitcoin goes up 50%, this is a trending market to the upside. If Bitcoin is crashing violently, this is also a trending market.
  • A choppy market means that the price is stagnating with small price increases and drops. Bitcoin might go up or down 1-3% each day for months at a time.
  • The Chop Zone is based on the Choppiness Index – an indicator designed to track if the market is trending or choppy. These indicators are often combined to give the trader additional context about the situation.
  • Chop Zone uses colored bars – turquoise and red being the most common. Turquoise signals a trending market and red signals a sideways market.
  • The Choppiness Index will have a Fibbonaci limit rating between 38.2 up to 61.8. The closer it is to 38.2, the more the market is trending and this can be confirmed with turquoise bars on the Chop Zone.

chop zone

What is the Chop Zone Indicator?

The Chop Zone indicator is a technical indicator that confirms trendiness or sideways movement in the price of Bitcoin (BTC). Crypto can only go three ways: Up, down, and sideways. Up and down are “trending” movements and sideways is a “choppy” movement. The Chop Zone indicator visually highlights when the price goes sideways.

The Chop Zone uses turquoise, red, and green bars to indicate price movement. It’s based on the Choppiness Index (CHOP) indicator that tracks market action using Fibbonaci levels between 38 up to 61. The two indicators are used together to add context to the colored bars on the Chop Zone indicator.

Traders can make greater profits when there is a trend in the market by opening long trades when the price goes up or short trades when the price goes down. In a sideways market, the price can go up and down in small 5-10% increments for months. This indicator was specifically designed to signal when a new trend is about to start and filter the noise of sideways movement.

The Chop Zone and Choppiness Index indicators are very different from other trend indicators. A trend indicator can show if the price will go up and down, and choppiness indicators only measure if the market is trending or if it’s going sideways. They are often used by professional traders to confirm trading bias and minimize risk before placing a trade.

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How to Use the Chop Zone Indicator

The Chop Zone technical indicator can be used on the monthly (1M), weekly (1W), daily (1D), and hourly charts. This indicator is best utilized for long-term trading and we’ll use the 1W chart as a default for this demonstration.

To understand the concept of ‘trending’ and ‘choppy’ markets, use the indicator to analyze historic price movements and compare them to the results on the indicator.

The indicator is available for free on all spot markets and futures markets. To get started, choose a trading pair such as BTC/USDT:

Bitcoin chart on Phemex without any indicators

The Bitcoin chart on Phemex without any indicators.

The chart is empty by default and you need to press on “Indicators” at the top and look for “Chop Zone”:

search for chop zone

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The indicator will appear in the search results. Left-click it and the chart will add it automatically:

Chop Zone indicator on the weekly Bitcoin chart

The Chop Zone indicator on the weekly Bitcoin chart.

At the time of writing, Bitcoin is trading at $39,275. This chart shows us Bitcoin price action for the past 100 weeks since the last bull run started in late 2020.

The colors on the bars below the Chop Zone indicator signify the following:

  • Turquoise: Trending market. There are two turquoise blocks – one when Bitcoin went on the first run in early 2021 and another when it set a new all-time high in November 2021.
  • Yellow: Sideways/choppy market. This is evident in the price action before the meteoric rise of Bitcoin in 2020.
  • Red: Sideways/choppy market with more intense price action than a typical sideways market.
  • Other colors: Shades of yellow and orange also indicate a choppy/sideways market.

Traders should look for turquoise to confirm a trending market and can safely ignore all other color variations because they all indicate a choppy market.

The indicator can give false signals if we use it on short-term charts because it may lead a trader to believe it’s a trending market, when in fact it keeps going sideways on the macro scale. If we switch the chart from the “W” (weekly) on the top-left to the “1H” (hourly) chart, the colors will change entirely:

Chop Zone indicator on the 1-hour chart

The Chop Zone indicator on the 1-hour chart.

The only way to reliably trade using the Chop Zone indicator is to use it on long-term charts such as 1W or 1M. This is because trends last 2-3 months at a time and many profitable trades can be made over an extended period, whereas in choppy markets a trend will often last less than 24 hours.

Combining Chop Zone with Other Indicators

The best Chop Zone indicator strategy is to combine the Chop Zone indicator with the Choppiness Index. Open up “Indicators” and search for “Choppiness Index”:

Combine Choppiness index with the Chop Zone

The Choppiness index is often combined with the Chop Zone indicator.

Left-click on the Choppiness Index and the two indicators will be loaded simultaneously:

Choppiness index with the Chop Zone

Two indicators working simultaneously beneath the Bitcoin chart.

The Choppiness index uses a visual line based on Fibonacci levels between 61.8 and 38.2. If a trader wishes, they can right click on “Settings” next to the “Chop” indicator and adjust the MA (moving average) from the default 14 down to 10 or less. They can also extend the length of the calculation.

If you notice the Chop line going up, this is an indicator we’re in a choppy/sideways market. If the line is going down, this is an indicator we’re in a trending market.

Fibonacci borders on the Choppiness index

The Fibonacci borders on the Choppiness index.

Using the example above, we can see that the Bitcoin bull run of 2020 started when the Choppiness Index line fell below the Fibonacci thresholds and entered a strong trending market that took the price from $10,000 up to $60,000 and more.

Bitcoin went sideways at that level for a few months and the sideways movement stopped in May 2021 when Bitcoin started dropping significantly. As we can see in the image above, the May crash was also reflected in the Choppiness Index going down again near the threshold. Despite being a small bear market, the Choppiness Index picked it up as a trending market.

Every time Bitcoin made a new all-time high in the last two years, the Choppiness Index showed a line hitting the lower barrier of the Fibonacci limits at 38 and there were consecutive turquoise bars on the Chop Zone indicator.

We can safely conclude that when there are more than three consecutive turquoise bars on the weekly chart, this is a sign of a trending market. When Bitcoin first reached $60,000 and then set a new all-time high of $69,000, the Choppiness Index declined rapidly – indicating a new trending market.

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What Are the Downsides of Chop Zone Indicator?

The main downside of the Chop Zone indicator is that it’s not reliable for short-term trades and bot trading. This indicator requires patience and will declare everything sideways as noise until there are powerful strong signals we’re in a trending market.

The last time the Chop Zone index posted over 10 consecutive turquoise bars on the weekly chart was when Bitcoin was rallying to the $69,000 high in November 2021. Despite dropping over 40% since the last all-time high, Bitcoin always had rallies which made the indicator believe it’s still going sideways.

The Chop Zone index is only suitable for patient traders who can wait for months or years at a time for the right opportunity. Even though it’s not uncommon for Bitcoin to trend for 10+ weeks at a time, it can also take months to get to a trending market.

This indicator will not tell a trader if they should long/short Bitcoin, but it will only analyze the volatility of the market and declare if it’s trending or not. Despite how it can be used for trading during sideways markets, it really excels as a trend-confirmation tool for bigger moves.

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Conclusion

The Chop Zone indicator is one of the most reliable indicators for filtering market noise. If Bitcoin goes up 20% in a day, there is no guarantee it won’t go sideways a day later. This indicator picks up when the trend pattern starts, helping a trader time the market and make profitable trades.

It serves as a supplemental indicator to the Choppiness Index indicator and visualizes the results in different colors. This indicator can help a trader minimize the risk of entering at the wrong time (market timing), by looking at the macro view and placing trades when the trend is confirmed.


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