Kaufman Efficiency Ratio

The Efficiency Ratio was invented by Perry J. Kaufman and presented in his book "New Trading Systems and Methods".

It is calculated by dividing the net change in price movement over N periods by the sum of the absolute net changes over the same N periods.

If a stock's trend is at perfect efficiency, it could move up 20 points over 20 days: 20 / 20 *100 = 100. Or down 20 points in 20 days: -20 / 20 * 100 = -100.

Most stocks, of course, will fall somwhere between 100 and - 100. Readings above 30 typically provide a good indication of an uptrend while readings below -30 indicate a downtrend.