Entropy Indicator Explained

The Entropy indicator imports information theory: it measures how unpredictable the recent distribution of price movement is. Low entropy = ordered, structured movement (trends, repeating rhythm); high entropy = maximal randomness, where patterns are illusions.

How It Works

• Shannon entropy computed on the window's distribution of price changes.
• High values: movement spread evenly across outcomes — noise.
• Falling entropy: order emerging from randomness.

How to Trade It

Entropy is a meta-filter: trade pattern-based systems only when entropy is below its recent norm, and treat falling entropy as the arming signal — structure is forming. In peak-entropy regimes, the honest trade is none.

Building It in Setup.Cash

Add Entropy in the strategy builder — the length input controls its sensitivity — and use its value in any entry, exit, or filter condition. You can also combine it with other tools in the Indicators Lab or via the AI indicator generator. Compare with the Choppiness Index, its price-geometry cousin. For the full category overview, see the volatility & statistics library guide.

Volatility indicators qualify trades rather than generate them — backtest your system with and without this filter and compare the drawdowns.