Kaufman Efficiency Ratio Stock Indices Technical Analysis & Kaufman Efficiency Ratio Stock Indices Signals

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

The Kaufman Efficiency measures the ratio of the relative market speed in relation to volatility. The Kaufman efficiency is often used by Stock Indices traders as a filter to help avoid trading when the stock indices market is "choppy" or flat ranging markets. The indicator also helps to identify smoother Stock Indices market trends. This is an oscillator indicator that oscillates between +100 and -100, where zero is the center point. +100 is upwards trending market & -100 is downward trending markets.

Kaufman Efficiency Ratio

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

Stock Indices Technical Analysis & How to Generate Trading Signals

The Kaufman is used to generate stock indices signals as follows:

The smoother the manner in which the stock indices 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 indices market stock indices trend movements (ranging stock indices markets).

• If the Efficiency Ratio shows a reading of +100 for a stock indices instrument, then that stock indices instrument is trending upward with perfect efficiency.
• If the Efficiency Ratio shows a reading of -100 for a stock indices instrument, then that stock index price is trending downwards with perfect efficiency.

However, it's almost impossible for a market stock indices 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.

Bullish/Buy Stock Indices Signal

Efficiency Ratio values above +30 indicate a smoother upward stock index trend.

Buy signal is generated above center-line mark.

Buy Stock Indices Signal

Bearish/Sell Stock Indices Signal

Efficiency Ratio values below -30 indicate a smoother downward stock index trend.

Sell Stock Indices Signal is generated below zero center-line mark.

Sell Indices Signal

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