Download the indicator
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• Trading view Version: Price Density (Market Noise) by Alejandro P
• MT4 Version: Check the Bonus Scripts and Resources section in your Member Dashboard
• (This filter is built into Desire To Trade Algos too)

Use in Desire To Trade Algos Advanced Filters #

In order to visualize the version of the indicator used in the Advanced filters of Desire To Trade made algos you will need to use a 14-period Price Density for the indicator, enable “Use Relative Price Density Calculations” or Percentile Ranking and set a 200 Percentile Rank Period.

The indicator built into the advanced trade filters Desire To Trade made algos takes any value below 25 as Extremely Low Market Noise, values between 25 and 50 will be treated as Low Volatility, anything between 50 and 75 as High Volatility, and anything from 75 to 100 as Extreme Volatility.

Supplementary lesson from Martyn Tinsley's algorithmic trading series: Understanding Market Noise | Increase your Trading Strategy's Edge

Description #

This is an indicator based on the Price Density concept. Price Density is a quantifiable method of measuring market noise for a certain period of candles.

This indicator also has the option to use relative percentile values which transforms the indicator from an absolute value measure to a percentile-based measure so it can be more easily compared across vastly different assets.

We can use Price Density to set rules and only trade particular systems when noise is at an appropriate level. For example, if noise is high then we would want to avoid trend following strategies and instead trade mean-reversion strategies, and vice-versa when the opposite is true. Price Density can also be used to match assets to strategies. Some assets will be naturally noisier than others and therefore we might have a principle where we only trade those noisy assets with our mean reversion strategies and the more quiet assets with trend following strategies.

Price Density can be used by looking at indicators and seeing how efficiently the indicator line moves from one side to the other. Is it in a straight line? Or are there lots of zigs and zags? The straighter the line, the less market noise there is.

Calculations:

Price Density = Sum(ATR(1), Length) / (Max(High) – Min(Low))

The numerator on top looks at the high of each of the bars, the low of a bar, calculates the difference, and then sums up all of those values for the time period. This gives us an idea of the fluctuation of the individual price moves. Next, the denominator uses the maximum value from all of the highs of those bars and subtracts the minimum low out of all of the bars. This gives us the range or the height of the box and so if there's a lot of price fluctuation compared to the actual range this means we'll have a high value which gives the indication that we have high levels of noise. If however, those individual fluctuations are small compared to the range this means we'll get a low value for the price density and therefore have low levels of noise.