Directional Efficiency Ratio for Trend Direction and Regime Estimation

Summary

The Efficiency Ratio, attributed here to Perry Kaufman, compares net price change over a period with the total absolute movement along the way. A larger ratio indicates that price traveled more directly and may be trending; a smaller ratio suggests a less directional path. The document describes a modified version intended to add trend direction and levels for distinguishing trending from ranging conditions.

The indicator also offers smoothing to make trend estimates easier to interpret and reduce false signals; smoothing can be disabled by setting its period to one or less. The description explains the calculation concept and the intended interpretation, but supplies no threshold values, formula details for the directional modification, chart examples, or performance tests. Its trend and regime labels should therefore be treated as estimates whose usefulness depends on settings and market context.

Key ideas

• The original Efficiency Ratio compares net price movement with total absolute movement over a period.
• Higher ratios are presented as evidence of a more efficient, directional price path.
• The described variant adds direction and levels to help assess trend direction and ranging conditions.
• Smoothing is offered to make the indicator easier to interpret and reduce false signals.
• The document gives no tested thresholds or performance evidence for the modified indicator.

Tags

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