Measuring Market Noise with Efficiency Ratio and Price Density
Summary
This article introduces market noise as a way to describe how directly prices travel between two points. It outlines several measures: an efficiency ratio comparing net price change with the sum of intervening moves, price density based on the range and price points over a lookback period, an estimated fractal dimension, and a close-to-open movement ratio relative to the period’s high-low range. The measures emphasize different details, but the article says they tend to produce similar assessments.
It distinguishes noise from volatility and uses persistence and volatility together to describe four market styles: smooth trends, choppy trends, narrow ranges, and wide swings. A moving-average example is presented as evidence that higher measured noise coincided with a lower trend-strategy profit factor, motivating the hypothesis that low noise can favor trend following and high noise can favor mean reversion. The evidence is limited: no detailed sample, statistical methods, or robustness results are supplied. The article also cautions that regime labels depend on trading horizon and cannot reliably predict the next regime.
Key ideas
- The efficiency ratio compares net movement with the cumulative path traveled over a period.
- Price density uses the period’s high-low range and price points to characterize movement.
- Volatility and persistence describe different aspects of market behavior and can be combined into four broad styles.
- The presented moving-average analysis associates higher noise with a lower trend-strategy profit factor.
- Historical noise measures can describe recent conditions but do not determine the market’s next regime.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.