Adaptive Kalman Trend Filter with Efficiency-Based Regime Bands

Summary

This indicator adapts a single-state Kalman filter using Kaufman’s Efficiency Ratio (ER). Each bar’s ER scales process noise between configured bounds: high efficiency increases the Kalman gain so the estimate follows directional price action more closely, while low efficiency reduces the gain and smooths choppy movement. The indicator also plots bands based on rolling residual volatility, widening their distance as efficiency falls. Its color state classifies price action as upward trend, downward trend, or neutral range.

The post describes possible uses for both trend-following and mean-reversion traders, including waiting for closed-bar color changes and seeking confirmation from a prior swing break. It says the recursive filter does not repaint closed bars and reports that it was built and tested primarily on EURUSD and GBPUSD hourly and four-hour charts. No quantified performance or comparative backtest results are supplied, and the suggested interpretations remain trading heuristics that require independent validation.

Key ideas

• The filter scales Kalman process noise using Kaufman’s Efficiency Ratio to adjust responsiveness to market conditions.
• Residual volatility and efficiency determine the width of the plotted regime bands.
• A color-coded state distinguishes directional trends from lower-efficiency ranging periods.
• The post proposes trend-following and mean-reversion interpretations, with secondary confirmation for entries.
• The author reports testing mainly on two forex pairs and two chart intervals but gives no quantified performance results.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.