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Kaufman Efficiency Ratio Trading Analysis and Kaufman Efficiency Ratio Trading Signals

Created by Perry Kaufman. Explained in his book entitled "New Systems and Methods".

Kaufman Efficiency estimates the ratio of the relative market speed in relation to the volatility. Kaufman efficiency is often used by the Gold traders as a filter to help avoid when market movement is "choppy" or flat range-bound markets. The technical indicator also helps to identify smoother trends. This is an oscillator 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 - MT4 Kaufman Efficiency Ratio Indicator

Kaufman Efficiency Ratio

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

Analysis and How to Generate Signals

The Kaufman is used to generate trading signals as follows:

The smoother the formation in which the market is trending then the greater the Efficiency Ratio shown by indicator. Efficiency Ratio values of around zero reflect a lot of market inefficiency or "choppiness" in the price trend movements (range markets).

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

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

Bullish/Buy Trading Signal

Efficiency Ratio values above +30 show a smoother upwards trend.

Buy trading signal is generated above center-line mark.

How to Add Kaufman Efficiency Ratio in Chart

Buy Signal

Bearish/Sell Trading Signal

Efficiency Ratio values below -30 show a smoother downwards trend.

Sell Trading Signal is derived & generated below zero center line mark.

How Do I Add Kaufman Efficiency Ratio on Trading Chart in Platform?

Sell Trading Signal

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

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