Developed by Perry Kaufman. Described in his book entitled “New Trading Systems and Methods”.
The Kaufman Efficiency indicator is a measures the ratio of the relative market speed in relation to the volatility. The Kaufman efficiency is often used by forex traders as a filter to help avoid trading when the market is “choppy” or flat ranging markets. The indicator also helps to identify smoother forex market trends. The Kaufman indicator is an oscillator indicator that oscillates between +100 and -100, where zero is the center point. +100 is upward forex trending market and -100 is downwards forex trending markets.
The Efficiency indicator is calculated by dividing the net change in the price movement over an n number of periods by the sum of all the bar-to-bar price changes taken as the absolute values over these same n-periods.
Technical Analysis of Kaufman Efficiency Ratio Technical indicator
The Kaufman is used to generate forex trading signals as follows:
The smoother the manner in which the forex 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 market trend movements (ranging forex markets).
- If the Efficiency Ratio indicator shows a reading of +100 for a currency pair, then that forex currency pair is trending upwards with perfect efficiency.
- If the Efficiency Ratio indicator shows a reading of -100 for a currency pair, then that currency is trending downwards with perfect efficiency.
However, it is almost impossible for a market trend to have a perfect efficiency ratio since any retracement movement against the current trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.
Efficiency Ratio values above +30 indicate a smoother forex uptrend.
Buy signal is generated above centerline mark.
Efficiency Ratio values below -30 indicate a smoother forex downtrend.
Sell Signal is generated below zero centerline mark.
However, it is good you experiment with other values to determine the most appropriate levels for the currency pair being traded and the value that is the best for your forex trading methodology that you are using.
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- Kaufman Efficiency Ratio - indicator for MetaTrader 5
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