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.
| Base Form |
100 * (C - Cx) / SUM(ABS(C - C1), x) |
x=Period, y=SMA, z=Offset |
| Alternate Form |
2 * RSIx.y.z - 100 |
Where x is the Period which must be an integer.
Where y is a the period of an optional simple moving average applied to the base calculations if desired. This would normally be set as 1 because applying a 1 period simple moving average is the same as not applying a moving average at all.
Where z is the offset. An offset of 1 would return the value from 1 bar ago instead of from the current bar.
The base form and the alternate form return the same results. The base form shows how the Kaufman Efficiency Ratio is actually calculated.
The alternate form allows for an optional moving average and offset and is a bit shorter however. It also gives some insight into how the Kaufman Efficiency Ratio and the plain RSI without Wilder's smoothing are related.
A 20 period Kaufman Efficiency Ratio can be written as follows.
100 * (C - C20) / SUM(ABS(C - C1), 20)
The alternate version is shorter.
2 * RSI20.1.0 - 100
And can be shortened even further by leaving out the optional simple moving average parameter and the offset parameter since no moving average is applied and the value is for the current bar and not a previous bar.
2 * RSI20 - 100
Using Efficiency Ratio in your Technical Analysis by Price Headley