Introduction
The Market Meanness Index (MMI) is a technical indicator created by Johann Christian Lotter, aka JCL, from the Financial Hacker website. This indicator relies on statistical calculations using the middle value of a price series. Its main job is to figure out if the market is trending or stuck in a range, moving back to its average. Traders find it useful for deciding whether to follow trends or to use it on its own as an indicator.
Computing the Market Meanness Index
The formula for the MMI is a statistical algorithm based on the median value of a price series that’s designed to measure the market’s meanness or randomness.
The MMI is determined by first finding the middle value of the price series, known as the median. To do this, the prices are arranged in ascending order, and the middle value is identified. The MMI is then calculated as the percentage of price changes that go above or below this median value. Another way to calculate it is by counting how many times the price series crosses its median value and dividing that count by the total number of observations.
The formula is as follows:
MMI = 100 * (nl + nh) / (Length - 1)
The “nh” variable in the MMI formula is computed by counting the number of times the price series crosses above its median value.
The “nl” variable in the MMI formula is computed by counting the number of times the price series crosses below its median value.
These variables “nh” and “nl” serve to adjust how sensitive the indicator is. By default, “nh” is set to 10, and “nl” is set to 90.
To enhance the sensitivity of the MMI, modify the “nh” and “nl” values. This increases the likelihood of the indicator spotting trending markets. Conversely, to reduce sensitivity, decrease the values of “nh” and “nl.” This makes the indicator less prone to identifying trending markets, albeit at the cost of fewer false signals.
The best settings for “nh” and “nl” depend on the market and timeframe you’re dealing with. To discover what works best for you, try out various values and experiment until you find the optimal ones.
The MMI is a handy tool for traders working across different markets and timeframes. It proves especially useful for those seeking to enhance their trading performance.
To refine the MMI and make it less susceptible to market noise, traders can apply a moving average, choosing either a simple or exponential one.
The MMI operates on a scale from 0 to 100, providing insights into whether the market is exhibiting a trend or behaving randomly. Higher MMI values indicate a more unpredictable market.
Traders leverage the MMI to determine if the market is trending or moving randomly. A low MMI suggests randomness, signaling that trend-following strategies might not be effective. Conversely, a high MMI suggests a trending market, indicating that trend-following strategies could yield positive results. This information empowers traders to adjust their strategies accordingly.
How to use Market Meanness Index for trading
Here are some guidelines for effectively utilizing MMI in trading the markets:
Identify Trending Markets
Check the MMI value to see if the market is trending. A high MMI means it’s trending, while a low MMI means it’s in a range. When MMI is rising, consider long trades. When it’s falling, look for short trades.
Filter Out Unreliable Trend Signals
If the MMI is low, it means the market isn’t trending, and trend signals may be inaccurate. Avoid trading when the MMI is low to minimize the risk of false signals.
Find Optimal Trending Environments:
Look for high MMI values combined with a rising trend. This signals a robust trending market, making it the ideal time for trend trades.
Some practical suggestions for effectively using the MMI:
- Combine the MMI with other technical indicators to validate trend signals.
- Utilize the MMI to establish both stop-loss and profit targets.
- Employ the MMI for effective risk management.
The MMI serves as a useful tool for traders aiming to enhance their trading outcomes. This simple, easy-to-use indicator is applicable across diverse markets and timeframes. Nevertheless, it’s crucial to note that the MMI lags behind current market conditions, and thus, should not be solely relied upon when making trading decisions.
Advantages & Limitations of the Market Meanness Index
Here are some advantages and limitations of using the Market Meanness Index in trading:
Advantages
- User-Friendly: The MMI is straightforward and user-friendly.
- Trend Identification: Being a trend-following indicator, it helps spot markets expected to keep moving in a specific direction.
- Market and Timeframe Flexibility: It suits various markets and timeframes, offering flexibility in its application.
- Versatility: The MMI is adaptable; it can either confirm other trading signals or independently generate its own signals.
Limitations
- Lagging Indicator: The MMI is a lagging indicator, meaning it won’t spot trends until they’re already in full swing.
- Susceptible to Market Noise: It’s prone to interference from market noise, potentially resulting in misleading signals.
- Not Foolproof: It’s not flawless and shouldn’t be the sole factor guiding your trading decisions.
The MMI stands as a useful tool for traders aiming to enhance their trading outcomes. It’s a straightforward indicator, user-friendly and applicable across different markets and timeframes. Yet, it’s crucial to note that it lags in providing signals and shouldn’t be solely relied upon when making trading choices.
The Market Meanness Index (MMI) serves as a useful tool for traders, aiding in the recognition of trending markets and the exclusion of less reliable trend signals. It proves versatile across different markets and timeframes, enhancing its applicability. Traders seeking to enhance their trading outcomes find the MMI particularly valuable.
The Market Meanness Index (MMI) acts as a delayed signal, only catching onto trends after they’ve already taken off. However, it’s prone to reacting to market noise, potentially causing misleading signals. To get reliable insights, it’s crucial to combine MMI with other technical indicators and approach risk management with caution.
