Direct Answer
Perry Kaufman's efficiency ratio measures how directly price moved over a window by dividing the net price change by the total path length of all bar-to-bar changes. It is the input that controls the speed of the Kaufman adaptive moving average. It ranges from 0 to 1.
Kaufman Efficiency Ratio: Formula, Meaning, Signals, Examples and How to Use It
How Is Kaufman Efficiency Ratio Calculated?
Perry Kaufman's efficiency ratio measures how directly price moved over a window by dividing the net price change by the total path length of all bar-to-bar changes. It is the input that controls the speed of the Kaufman adaptive moving average.
Formula: ER = |Close(t) - Close(t-n)| / Sum(|Close(i) - Close(i-1)|) for i from t-n+1 to t
Inputs:
- Closing prices
- Lookback n (10 is a common setting)
Worked example. Price moved from 100 to 106 over the window while the sum of absolute bar-to-bar changes was 15, giving an efficiency ratio of 0.40. The inputs are illustrative numbers, not market data.
Reading it. It ranges from 0 to 1. A value near 1 means price moved almost in a straight line, while a value near 0 means much movement cancelled out, as in a choppy range. It shows trend quality but not direction.
Limits. It is direction-blind and depends on the lookback; a short window can swing between high and low readings. A single large move can dominate the ratio until it leaves the window.
What is Kaufman Efficiency Ratio?
Perry Kaufman's efficiency ratio measures how directly price moved over a window by dividing the net price change by the total path length of all bar-to-bar changes. It is the input that controls the speed of the Kaufman adaptive moving average.
How to use Kaufman Efficiency Ratio
It ranges from 0 to 1. A value near 1 means price moved almost in a straight line, while a value near 0 means much movement cancelled out, as in a choppy range. It shows trend quality but not direction. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- The ratio of net change to total path length is bounded between 0 and 1, giving a unitless read on how straight the move was.
- It uses only closing prices and one lookback, and it feeds directly into Kaufman's adaptive average, so its role is easy to trace.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- A value near 1 describes a straight path but not a large one, so a tiny steady drift and a big steady rally can score the same.
- Tick-level noise such as bid-ask bounce adds path length in the denominator and pushes the ratio lower on its own.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is Kaufman Efficiency Ratio a buy or sell signal?
No. It ranges from 0 to 1. It is direction-blind and depends on the lookback; a short window can swing between high and low readings. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for Kaufman Efficiency Ratio?
Kaufman Efficiency Ratio takes these inputs: closing prices; lookback n (10 is a common setting). There is no universal best setting for the tunable ones, so test them across instruments, regimes and out-of-sample periods and favor stable parameter regions over one historical winner.
Can Kaufman Efficiency Ratio be used by itself?
It is direction-blind and depends on the lookback; a short window can swing between high and low readings. A single large move can dominate the ratio until it leaves the window. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does Kaufman Efficiency Ratio work on every timeframe?
The calculation (ER = |Close(t) - Close(t-n)| / Sum(|Close(i) - Close(i-1)|) for i from t-n+1 to t) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does Kaufman Efficiency Ratio give false signals?
A value near 1 describes a straight path but not a large one, so a tiny steady drift and a big steady rally can score the same. Tick-level noise such as bid-ask bounce adds path length in the denominator and pushes the ratio lower on its own. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should Kaufman Efficiency Ratio be backtested?
Rebuild Kaufman Efficiency Ratio from closing prices using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.