Kaufman Efficiency Ratio Technical Analysis & Kaufman Efficiency Ratio Trade Signals

Created by Perry Kaufman. Described in his book entitled "New Systems and Techniques".

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 trading market is "choppy" or flat ranging markets. The indicator also helps to identify and spot smoother Indices market trends. This is an oscillator that oscillates between +100 & -100, where zero is the center point. +100 is upwards trending market and -100 is downwards trending markets.

Kaufman Efficiency Ratio

The Efficiency indicator is calculated by dividing the net change in stock indices trading price movement over an n number of periods by the sum of all the bar-to-bar trading price changes taken as a absolute values over these same n periods.

Technical Analysis and Generating Signals

The Kaufman is used to generate stock signals as follows:

The smoother the manner in which the trading market is trending then the more the Efficiency Ratio displayed and shown by trading indicator. Efficiency Ratio readings of around zero indicate a lot of market inefficiency or "choppiness" in the trend moves (range bound stock 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 indices trading price is trending downwards with perfect efficiency.

However, it is almost impossible for a trend movement to attain perfect efficiency ratio since any price pullbackpullback movement against current trend direction during the trading time period which is being used in calculating the indicator would decrease the efficiency ratio.

Bullish/Buy Trade Signal

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

Buy signal gets generated above centerline mark.

Buy Trade Signal

Bearish/Sell Trade Signal

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

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

Sell Trade Signal

However, it is good you experiment with other values to identify the most appropriate levels for indices being traded and the value that is the best for your trading methodology that you're using.

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