Shannon Entropy (Quant Lab)

🟦 Shannon Entropy = The level of "order" or "chaos" in the market.

This indicator gives you the answer to the question:

"Is the market currently orderly and understandable, or is it random and chaotic?"

No other classical indicator can accurately show this.

The value of Entropy is between 0 and 1:

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🟩 1) Entropy = 0.0 – 0.3 → Structured, orderly, readable market

During these periods, the price:
• A trend forms • Ranges work clearly • Patterns (head & shoulders, flag, triangle) form smoothly • Systems like Z-score, VWAP, EMA work very cleanly • Data for modeling (algorithmic strategies, ML) is high quality

Think of this region as follows:

The market "works according to rules," it's easy to trade.

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🟧 2) Entropy = 0.3 – 0.7 → Normal behavior region

In this region:
• Neither too orderly nor too chaotic
• Most systems operate at an average rate • We can say the market is healthy

It is tradable; however, the conditions are not perfect.

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🟥 3) Entropy = 0.7 – 1.0 → Chaos / Noise / Manipulation region

This is the MOST DANGEROUS REGION OF THE MARKET.

What happens?
• Prices jump randomly left and right. • Wicks increase excessively. • Fake breakouts multiply. • The win rate of strategies decreases. • Trend-following systems constantly generate "false signals." • Even mean-reversion systems are caught off guard. • ML models learn junk data during these periods. • Generally, news, liquidation cascades, and manipulation periods increase entropy.

This period perfectly illustrates:

"There is no logic in this market right now — it's moving randomly."

Therefore, it's a period where you need to be very careful:

Reduce position size. • Trade less. • Avoid unnecessary risks. • Tighten stop losses. • Don't use leverage.

This is your risk alert panel.

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🔥 The real superpower Entropy gives you: Trend selection and system selection

Entropy → Determines which strategy you will use.

✔ Low Entropy → Trend following or mean-reversion that works like a toy

✔ High Entropy → Even opening a trade is risky

✔ Normal Entropy → Most strategies work

Building a strategy without this information is unprofessional.

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🧠 Critical summary (you can even copy and paste it as a description in TradingView):

Low entropy → market is structured, patterns & trends are reliable
High entropy → market is chaotic, noisy, unpredictable; avoid aggressive trading
Entropy tells you if your strategy has a high chance or low chance of working

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🟦 Signals Entropy gives in practice:

🔹 Entropy is falling →

The market is stabilizing → A major trend or strong move is approaching.

🔹 Entropy is rising →

The market is becoming chaotic → Sudden spike, a period of trading in prayer mode, extra risk.

🔹 Low Entropy + VR > 1 + High ER → FULL TREND MARKET

A true “trend paradise” period.

🔹 Low Entropy + VR < 1 + High FDI → RANGE MARKET

A paradise of mean reversion.

🔹 High Entropy + High VoV → DANGEROUS PERIOD

Big explosions, news, and liquidations happen here.

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⭐ IN SHORT:

Entropy = an indicator of how randomly the market behaves.
• 0–0.3 → regular, good, reliable market
• 0.3–0.7 → normal market
• 0.7–1.0 → chaotic, dangerous market

It tells you at a glance whether you should trade during this period or not.