Kaufman Efficiency Ratio Analysis Signals
Created by Perry Kaufman. Described in his book entitled "New Trade Systems & Techniques".
The Kaufman Efficiency measures ratio of the relative market speed in relation to volatility. Kaufman efficiency is oftenly used by the traders as a filter to help avoid trading when market is "choppy" or flat ranging markets. The trading indicator also helps to identify smoother price trends. This is an oscillator that oscillates between +100 and -100, where zero is the center point. +100 is upward trending market and -100 is downward trending markets.
Kaufman Efficiency Ratio
The Efficiency indicator is calculated by dividing the overall net change of the price movement over an n-number of periods by the sum of all the bar to bar trading price changes taken as absolute values over these same n-periods.
Technical Analysis & How to Generate Signals
Kaufman is used to generate trade signals as follows:
The smoother the manner formation in which the market is trending then the greater the Efficiency Ratio displayed and illustrated by trading indicator. Efficiency Ratio values of around zero show a lot of market inefficiency or "choppiness" in the market trend movements (range markets).
- If the Efficiency Ratio shows a reading of +100 for a currency pair, then that forex 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 trend move to attain a perfect efficiency ratio since any retracementpull-back move against current market trend direction during the trading time period being used in calculating the trading indicator would decrease this efficiency ratio.
Bullish/Buy Trade Signal
Efficiency Ratio values above +30 show a smoother up-trend.
Buy trade signal is generated/derived above center-line mark.
Buy Trade Signal
Bearish/Sell Trade Signal
Efficiency Ratio values below -30 show a smoother down-trend.
Sell Trade Signal is derived & generated below zero centerline mark.
Sell Signal
However, it's good you experiment with other values to figure out the most appropriate levels for the currency pair being traded and the value that is the best for your trading technique that you are using.
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