Kaufman Efficiency Ratio Analysis - Trading Signals from Kaufman Ratio

Developed by Perry Kaufman. Explained in his book entitled "New Systems and Techniques".

The Kaufman Efficiency shows how fast the market is moving compared to how unsteady it is. Traders often use the Kaufman efficiency to help them avoid trading when the market is moving without a clear direction or staying within a limited range. This indicator also helps to find and see smoother trends in the market. This tool moves between +100 and -100, with zero as the middle. +100 means the market is trending up, and -100 means it's trending down.

Kaufman Efficiency Ratio

The calculation for the Efficiency indicator involves dividing the net shift in the trading price of stock indices across 'n' periods by the aggregate sum of all sequential trading price changes, taken as absolute values, over those identical 'n' periods.

Technical Analysis and Generating Signals

The Kaufman is used to generate stock signals as follows:

A smooth market trend shows a high efficiency ratio on the indicator. Low readings near zero mean choppy moves or sideway markets with little direction.

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

No trend achieves a perfect efficiency ratio. Any pullback against the trend lowers the score. This happens during the period used for the indicator calculation.

Bullish/Buy Signal

Efficiency Ratio readings above +30 indicate a smoother upward trend.

Buy signal gets generated above center-line mark.

Buy Signal

Bearish/Sell Signal

Efficiency Ratio readings below -30 indicate a smoother downwards trend.

Sell Trade Signal gets generated below the zero center line mark.

Sell Signal

Test other values to find best levels for your indices trades. Match them to your trading style.

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