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Kaufman Efficiency Ratio Forex Technical Analysis and Kaufman Efficiency Ratio Forex Trading Signals

Developed by Perry Kaufman. Described in his book entitled “New Trading Systems and Methods”.

 

The Kaufman Efficiency is a measures the ratio of the relative market speed in relation to the volatility. The Kaufman efficiency is often used by Forex traders as a filter to help avoid trading when the market is “choppy” or flat ranging markets. The indicator also helps to identify smoother Forex market trends. This is an oscillator indicator that oscillates between +100 and -100, where zero is the center point. +100 is upward trending market and -100 is downwards trending markets.

Kaufman Efficiency Ratio Technical indicator

Kaufman Efficiency Ratio


The Efficiency indicator is calculated by dividing the net change in the price movement over an n number of periods by the sum of all the bar-to-bar price changes taken as the absolute values over these same n-periods.

 

 

Forex Technical Analysis and Generating Forex Trading Signals

 

The Kaufman is used to generate trading signals as follows:

 

The smoother the manner in which the forex market is trending then the greater the Efficiency Ratio shown by the indicator. Efficiency Ratio value readings of around zero indicate a lot of inefficiency or “choppiness” in the market trend movements (ranging forex markets).

 

  • If the Efficiency Ratio shows a reading of +100 for a currency pair, then that forex currency pair is trending upwards with perfect efficiency.
  • If the Efficiency Ratio shows a reading of -100 for a currency pair, then that currency is trending downwards with perfect efficiency.

 

However, it is almost impossible for a market trend to have a perfect efficiency ratio since any retracement movement against the current trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.

 

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Bullish/Buy Signal

Efficiency Ratio values above +30 indicate a smoother uptrend.

Buy signal is generated above center-line mark.

Kaufman Efficiency Ratio Technical indicator Buy Signal

Buy Signal

 

Bearish/Sell Signal

Efficiency Ratio values below -30 indicate a smoother downtrend.

Sell Signal is generated below zero center-line mark.

Kaufman Efficiency Ratio Technical indicator Sell Signal

Sell Signal

 

However, it is good you experiment with other values to determine the most appropriate levels for the currency pair being traded and the value that is the best for your Forex trading methodology that you are using.

Forex Market Sentiment

The EURUSD is at a major support level, Open an account and start trading EURUSD which is oversold and at a major support level: Read The Article "Support and Resistance levels"

Another reason to start being bullish on the EURUSD and EURJPY is Risk Appetite vs The Risk Averse sentiment used when trading high yielding currencies vs the US Dollar and the Japanese Yen when world economies start reporting data that is supporting economic growth: Read The Article "Risk Appetite vs The Risk Averse"


Eurozone Economic Growth Gains Momentum in November - Eurozone economic growth accelerated to its fastest pace and was at an all-time high, order books grew and factories were prompted to add more workers and raise the prices of their goods as the economic environment in Europe grew the fastest as shown by economic data – November Composite PMI for manufacturing and services grew to the strongest in 18 months and was at an all-time high of 54.1, up from 53.3 in October. There are two PMI data reports - one for manufacturing and the other one for services. The PMI for manufacturing was at an all-time high of 34 months and rose to 53.7 in November while that of services rose to an all-time 11 months high of 54.1; Marking a strong expansion in economic growth and signaling that the recovery in Europe is continuing to gather momentum thanks to the €1.7 trillion quantitative-easing program being carried out by ECB in Europe. IHS Markit has said that companies are on boarding new staff at the fastest pace ever since 2008, as the prices of goods increased the most in five years as companies continued to pass the production cost to their consumers – the November PMI showed the steepest monthly increase in business activity with plenty of signs that the economic growth will continue to accelerate as the inflation in Europe continues to intensify steadily. Open an account and start trading EURUSD and EURJPY today.


Major Market Mover - Non Farm Payrolls on Friday: Open an Account Today and Trade NFP on Friday

First OPEC Deal on Oil production cut in 8 years fuels more risk appetite: Open an Account Today - Don't Miss Out on the trades


Read The Articles: Eurozone Economic Growth Gains Momentum in November - Fueling Risk Appetite in FX trading


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