Kaufman Efficiency Ratio Gold Trading Analysis and Kaufman Efficiency Ratio Trading Signals

Created by Perry Kaufman. Described in his book entitled "New Trading Systems & Techniques".

The Kaufman Efficiency measures the ratio of the relative market speed in relation to volatility. 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

Efficiency indicator is calculated by dividing net change in xauusd price movement over an n number of periods by sum of all the bar-to-bar xauusd price changes taken as a absolute values over these same n periods.

Gold Trading Analysis & How to Generate 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's almost impossible for a market gold trend to have a perfect efficiency ratio since any retracement movement against the current trend direction during the time period being used to calculate the indicator would decrease the efficiency ratio.

Bullish/Buy Trading Signal

Efficiency Ratio values above +30 indicate a smoother upward xauusd trend.

Buy trading signal is generated above center-line mark.

Buy Trading Signal

Bearish/Sell 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 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 technique that you are using.