ER was developed by a systematic trader by the name of Perry J. Kaufman.
The formula is:
= A divided by B,
- 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 implied by ER (very experimental, opening the floor for suggestions on how this can be improved)
- 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.
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.