Kaufman Efficiency Ratio Technical Analysis and Kaufman Efficiency Ratio Signals
Developed by Perry Kaufman. Described in his book entitled "New Systems & Methods".
The Kaufman Efficiency measures the ratio of the relative market speed in relation to the volatility. The Kaufman efficiency is often used by traders as a filter to help avoid trading when the market is "choppy" or flat ranging markets. The indicator also helps to identify smoother XAUUSD market trends. This is an indicator that oscillates between +100 and -100, where zero is the center point. +100 is upward trending market & -100 is downward trending markets.
Kaufman Efficiency Ratio
The Efficiency indicator is calculated by dividing the net change in gold price movement over an n number of periods by the sum of all the bar-to-bar price changes taken as a absolute values over these same n periods.
Technical Analysis & How to Generate Signals
Kaufman is used to generate trading signals as follows:
The smoother the manner in which the market is trending then the greater the Efficiency Ratio shown by the technical indicator. Efficiency Ratio value readings of around zero indicate a lot of inefficiency or "choppiness" in the price trend movements (ranging markets).
- If the Efficiency Ratio shows a reading of +100 for a instrument, then that xauusd is trending upward with perfect efficiency.
- If the Efficiency Ratio shows a reading of -100 for a instrument, then that gold price is trending downwards with perfect efficiency.
However, it's almost impossible for a market trend move to attain a perfect efficiency ratio since any retracementpullback movement against current trend direction during the trading time period that is being used to calculate the technical indicator would decrease this efficiency ratio.
Bullish/Buy Trading Signal
Efficiency Ratio values above +30 indicate a smoother upward trend.
Buy trade signal is generated above center-line mark.
Buy Trade Signal
Bearish/Sell Trading Signal
Efficiency Ratio values below -30 indicate a smoother downwards trend.
Sell Trade Signal is generated below zero centerline mark.
Sell Gold Signal
However, it is good you experiment with other values to determine the most appropriate levels for the instrument being traded and the value that is the best for your xauusd methodology that you're using.
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