PZ Lopez Efficiency

This indicator analyzes how efficient is the current market movement based on the true high-low ratio of a certain number of bars.

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• The ratio is the effectiveness of the market movement
• A ratio below 1 means the market is going nowhere
• A ratio above 1 means the market is starting to show directionality
• A ratio above 2 means the market is showing effective movement
• A ratio above 3 means the market moved too much: it will halt or retrace

It has straightforward trading implications.

• Look for positional opportunities when the line is red
• Look for range trading opportunities when the ratio is orange
• Look for trend trading opportunities when the ratio is blue

How is the indicator calculated?

The indicator displays how many typical true ranges has the market moved during the desired number of bars. The typical true range is the average true high-low range from the last number of bars, which is later compared with the absolute market movement during the same period of time. The indicator ratio gives you a measure of market efficiency, as a ratio between the range and the market movement. Zero means the market is not efficient and is going nowhere.

Settings

The indicator has only one parameter: the indicator period, which is the amount of bars to evaluate back.

Author

Arturo López Pérez, private investor and speculator, software engineer and founder of Point Zero Trading Solutions.