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Kaufman's Efficiency Ratio Strategy [KL]

I recently published an indicator called "Kaufman's Efficiency Ratio Indicator". In the description of that script, I hypothesized about how the Efficiency Ratio could be applied to identify bullish moves in instances where price had already gone up steeply, but rests for a while, allowing for entry in expectation that price will continually rise. I decided to test out this idea with Pinescript.

About Kaufman's Efficiency Ratio ("ER")
ER was developed by a systematic trader by the name of Perry J. Kaufman.

Formula
The formula is:
= A divided by B,
where:
  • A = Current closing price minus the closing price at the start of the lookback period
  • B = Sum of differences between closing prices (in absolute terms) of consecutive bars over the lookback period

How this strategy enters a trade (Long):
- code: entry_signal_long = ER > 0 and ER_is_mid
- meaning: when ER is positive, strategy assumes price has risen. Usually ER value begins high (red), and unless it is a false move, then it should stay positive. This strategy will patiently wait until ER drops to medium (yellow), and then place a trade.
- how low/medium/high is dynamically determined: Refer to the description of my other script("Kaufman's Efficiency Ratio Indicator") for details. Trying to keep this as short as possible.

How this strategy exits a trade (Long):
- when price hits stop limit; stop limit is based on low of bars, trails upward based on ATR
- included a feature called "tightening TSL", which tries to reduce the stop-buffer during periods of high volatility implied by ER (very experimental, opening the floor for suggestions on how this can be improved)
Versionshinweise: Added profit taking levels. Also amended risk management aspects the strategy.
Changes:
- Order size is based on user-defined percentage of committed capital
- Profit taking over 3 levels based on risk to reward ratio (i.e. 1R, 2R, 3R). When a target is met at each tier, strategy will close out one third of current position size. Unreached targets will eventually be closed at the trailing stoploss price.
Versionshinweise: (a) Fixed a bug relating to profit taking over 3 levels (described in the previous update), and (b) refactored other parts of the codes to have (neat spacings, better variable names, etc).
Versionshinweise: (a) Added short (default not used), and (b) removed: entry confirmation checking for ER being low/mid/high. Through backtests, noticed better results when not using it.

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Open-source Skript

In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.

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