Kaufman Efficiency Ratio Gold Trading Analysis and Kaufman Efficiency Ratio Gold Trading Signals
Developed by Perry Kaufman. Described in his book entitled “New Trading Systems and Methods”.
The Kaufman Efficiency is a measures the ratio of the relative market speed in relation to the volatility. The Kaufman efficiency is often used by Gold traders as a filter to help avoid trading when the xauusd market is “choppy” or flat ranging markets. The indicator also helps to identify smoother Gold market trends. This is an oscillator indicator that oscillates between +100 and -100, where zero is the center point. +100 is upward trending market and -100 is downwards trending markets.
Kaufman Efficiency Ratio
The Efficiency indicator is calculated by dividing the net change in the xauusd price movement over an n number of periods by the sum of all the bar-to-bar xauusd price changes taken as the absolute values over these same n-periods.
XAUUSD Trading Analysis and Generating XAUUSD Trading Signals
The Kaufman is used to generate gold signals as follows:
The smoother the manner in which the xauusd 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 xauusd market trend movements (ranging gold 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 xauusd price is trending downwards with perfect efficiency.
However, it is almost impossible for a market gold trend to have a perfect efficiency ratio since any retracement movement against the current gold trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.
Bullish/Buy Gold Trading Signal
Efficiency Ratio values above +30 indicate a smoother upward xauusd trend.
Buy signal is generated above center-line mark.
Buy Gold Trading Signal
Bearish/Sell Gold Trading Signal
Efficiency Ratio values below -30 indicate a smoother downward xauusd trend.
Sell Gold Trading Signal is generated below zero center-line mark.
Sell Gold Trading Signal
However, it is 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 trading methodology that you are using.