Kaufman Efficiency Ratio for Distinguishing Trends from Choppy Markets

Summary

Kaufman’s Efficiency Ratio compares the net price change over a chosen lookback with the sum of absolute step-by-step price changes over that same period. The ratio runs from zero to one: values nearer one indicate a relatively direct move, while lower values indicate more back-and-forth movement. The document also identifies the measure as Fractal Efficiency and describes it as a way to filter for trending versus sideways conditions.

The example uses closing prices and a lookback parameter, calculating the absolute difference between the current close and the earlier close, then dividing by the accumulated absolute close-to-close changes. It gives no market test, threshold, trading rule, or performance evidence, so it explains the indicator’s construction and intended interpretation rather than demonstrating predictive value. Results depend on the selected lookback, and the ratio alone does not specify direction or establish whether a trade is worthwhile.

Key ideas

• The ratio divides net price displacement by the total absolute movement over the lookback.
• Values nearer one suggest a more directional path, while lower values suggest choppier movement.
• The measure can be used to distinguish trending conditions from sideways conditions.
• The document provides no tested thresholds or evidence of profitability.

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