Using a Price Efficiency Ratio to Distinguish Trends from Ranges

Summary

The document describes a signal-to-noise indicator intended to distinguish directional markets from ranges. Over a lookback of 14 bars, it divides the absolute change from the current close to the earlier close by the sum of absolute close-to-close changes across the period. A result above a stated threshold is interpreted as trending, while a result at or below it is interpreted as ranging. The indicator plots both the ratio and a reference level.

This construction compares net displacement with the total path traveled: a smoother move produces a higher ratio, while back-and-forth price movement lowers it. The text and formula disagree about the threshold: the prose describes one-half of pi, whereas the code calculates one divided by pi and then divided by two. The document gives no empirical evidence for either cutoff and does not discuss instrument or timeframe calibration. The measure can be understood as a regime heuristic, but its classification should be tested for the intended market and data frequency.

Key ideas

• The ratio divides net close displacement over the lookback by cumulative absolute price changes.
• A larger value is interpreted as more directional movement, and a smaller value as range-bound movement.
• The example uses a 14-bar lookback and plots a reference threshold.
• The prose threshold and the threshold calculated by the code do not match.
• No performance or calibration evidence is provided for the regime rule.

Tags

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