Kaufman Efficiency Ratio Technical Analysis & Kaufman Efficiency Ratio Trading 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 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 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 shown by trading indicator. Efficiency Ratio value readings of around zero indicate a lot of inefficiency or "choppiness" in the trend moves (ranging 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 stock 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 to calculate the indicator would decrease the efficiency ratio.
Bullish/Buy Trade Signal
Efficiency Ratio values above +30 indicate a smoother upward trend.
Buy signal gets generated above centerline mark.
Buy Trading Signal
Bearish/Sell Trade Signal
Efficiency Ratio values below -30 indicate a smoother downwards trend.
Sell Trading Signal gets generated below the zero center line mark.
Sell Trade 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 trading methodology that you're using.
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