Kaufman Efficiency Ratio Indices Technical Analysis and Kaufman Efficiency Ratio Indices Trading Signals
Developed by Perry Kaufman. Described in his book entitled “New Trading Systems and Methods”.
The Kaufman Efficiency is a measures the ratio of the relative market speed in relation to the volatility. The Kaufman efficiency is often used by Indices traders as a filter to help avoid trading when the stock indexes trading market is “choppy” or flat ranging markets. The indicator also helps to identify smoother Indices market trends. This is an oscillator indicator that oscillates between +100 and -100, where zero is the center point. +100 is upward trending market and -100 is downwards trending markets.
Kaufman Efficiency Ratio
The Efficiency indicator is calculated by dividing the net change in the stock indexes price movement over an n number of periods by the sum of all the bar-to-bar stock indexes price changes taken as the absolute values over these same n-periods.
Indices Technical Analysis and Generating Indices Trading Signals
The Kaufman is used to generate stock indices signals as follows:
The smoother the manner in which the stock indexes 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 stock indexes trading market indices trend movements (ranging stock indices markets).
- 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 stock indexes price is trending downwards with perfect efficiency.
However, it is almost impossible for a market indices trend to have a perfect efficiency ratio since any retracement movement against the current indices trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.
Bullish/Buy Indices Trading Signal
Efficiency Ratio values above +30 indicate a smoother upward indices trend.
Buy signal is generated above center-line mark.
Buy Indices Trading Signal
Bearish/Sell Indices Trading Signal
Efficiency Ratio values below -30 indicate a smoother downward indices trend.
Sell Indices Trading Signal is generated below zero center-line mark.
Sell Indices Trading Signal
However, it is good you experiment with other values to determine the most appropriate levels for indices being traded and the value that is the best for your indices trading methodology that you are using.