Trade Forex Trading

Kaufman Efficiency Ratio Analysis Signals

Perry Kaufman created it. He covers it in his book "New Trade Systems and Techniques and Methods."

The Kaufman Efficiency looks at how fast the market is moving compared to its ups and downs. Traders often use this measure as a way to steer clear of times when the market is uneven or just not moving much. It also helps in spotting clearer price trends. This tool gives a value that goes from +100 to -100, with zero being in the middle. A +100 means the market is climbing, while a -100 indicates the market is falling.

Kaufman Efficiency Ratio – How to Set Up and Read Kaufman Efficiency Ratio in Your Chart

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 and How to Generate Signals

Kaufman is used to generate trade signals as follows:

The smoother the trend, the higher the Efficiency Ratio from the indicator. A value near zero means choppy, inefficient markets with side-to-side moves.

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

Identifying Buy Signals Using the Kaufman Efficiency Ratio Indicator

Buy Signal

Bearish/Sell Trade Signal

Efficiency Ratio values below -30 show a smoother down-trend.

Sell Trade Signal is derived & generated below zero center line mark.

Kaufman Efficiency Ratio Analysis

Sell Signal

Nevertheless, it is beneficial to experiment with alternative numerical values to ascertain the most suitable settings for the specific forex currency pair you are trading, aligning with the best fit for your personal trading methodology.

Study More Lessons and Tutorials and Topics:

Forex Broker