Kaufman Efficiency Ratio Commodity Trading Technical Analysis & Kaufman Efficiency Ratio Trading Signals

Developed by Perry Kaufman. Described in his book entitled "New Trading Systems & Techniques".

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

Kaufman Efficiency Ratio

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

Commodity Trading Technical Analysis & How to Generate Trading Signals

The Kaufman is used to generate commodity signals as follows:

The smoother the manner in which the commodities trading 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 commodities trading market commodity trend movements (ranging commodity markets).

• If the Efficiency Ratio shows a reading of +100 for commodity, then commodity is trending upward with perfect efficiency.
• If the Efficiency Ratio shows a reading of -100 for commodity, then that commodity price is trending downwards with perfect efficiency.

However, it's almost impossible for a market commodity 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.

Bullish/Buy Trading Signal

Efficiency Ratio values above +30 indicate a smoother upward commodities trend.

Buy signal is generated above center-line mark.

Buy Trading Signal

Bearish/Sell Trading Signal

Efficiency Ratio values below -30 indicate a smoother downward commodities trend.

Sell Commodity Trading Signal is generated below zero center-line mark.

Sell Trading Signal

However, it is good you experiment with other values to determine the most appropriate levels for commodity being traded and the value that is the best for your commodity technique that you are using.