Kaufman Efficiency Ratio Oil Trading Technical Analysis & Kaufman Efficiency Ratio Trading Signals

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

The Kaufman Efficiency measures the ratio of the relative market speed in relation to volatility. The Kaufman efficiency is often used by Oil traders as a filter to help avoid trading when the crude oil market is "choppy" or flat ranging markets. The indicator also helps to identify smoother Oil market trends. This is an oscillator indicator that oscillates between +100 and -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 crude oil price movement over an n number of periods by the sum of all the bar-to-bar crude oil price changes taken as a absolute values over these same n periods.

Oil Trading Technical Analysis & How to Generate Trading Signals

The Kaufman is used to generate oil signals as follows:

The smoother the manner in which the crude oil 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 crude oil market oil trend movements (ranging oil markets).

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

However, it is almost impossible for a market oil trend to have a perfect efficiency ratio since any retracement movement against the current oil trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.

Bullish/Buy Trading Signal

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

Buy signal is generated above center-line mark.

Buy Trading Signal

Bearish/Sell Trading Signal

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

Sell Oil Signal is generated below zero center-line mark.

Sell Trading Signal

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