Strategies that generally utilize the PFE as a signal consider a buy sign as a reversal toward the indicator and its movement from its base value to zero. A signal to close a position emerges as the value of the indicator arrives at its top over zero. As a rule of thumb, traders ought to buy to cover all short positions after the indicator forms another base. The Polarized Fractal Efficiency (PFE) indicator measures the efficiency of price movements by drawing on concepts from fractal geometry and chaos theory. The more linear and efficient the price movement, the shorter the distance the prices must travel between two points and thus the more efficient the price movement.
Market Synopsis
- The term polarized fractal productivity (PFE) alludes to a technical indicator that is utilized to determine the price efficiency for an investment over a client characterized period.
- Then, a plus sign is attached when the move is down, and a minus sign when the move is up to get a polarized fractal efficiency.
- The general forex strategy used in PFE uses an indicator to predict trend changes.
- One of them has sold 30,000 copies, a record for a financial book in Norway.
- They would need to learn how the price moves and how indicators like the PFE try to use price data to distill out specific information about the market.
Hans Hannul first introduced polarized fractal efficiency indicator in the January 1994 edition of “Technical Analysis of Stocks & Commodities”. The trading indicator’s purpose is to identify the degree of effectiveness of price movements and determine how chaotic or directional price changes were in the recent past. PFE readings above zero indicate that the trend is up and the higher the reading the “trendier” and more efficient the upward movement. The lower the reading the “trendier” and more efficient the downward movement. Readings near zero indicate choppy, less efficient movement and a balance between supply and demand.
Polarized Fractal Efficiency (Pfe): Meaning, Formula, Example
The buy signal is a reversal in thedirection of the indicator and its movement from the minimum to zero. Signal toclose the position occurs if the value of the indicator reaches its peak abovezero. Any shortposition should be covered after the formation of a new minimum of the value ofindicator.
The polarized fractal productivity indicator was developed by creator, engineer, developer, and trader Hans Hannula. The thought was first referenced in 1994 in the January issue velocity trade of Technical Analysis of Stocks and Commodities magazine. Securities with a PFE greater than zero trend up, while a perusing of under zero shows a descending trend. The PFE does not directly relate to volatility in markets, but it can give a clue about market choppiness and the efficiency of the market.
What resources are available for further learning about PFE?
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If the PFE reading is in proximity to zero, this means that market movement is choppy and less efficient. Hakan Samuelsson and Oddmund Groette are independent full-time traders and etoro investors who together with their team manage this website. They have 20+ years of trading experience and share their insights here. The historical data the PFE considers are the price data and the trader’s chosen period.
The price shows a vertical trend on the off chance that the PFE goes over zero and a descending trend assuming it dips under zero. The indicator was developed by creator, engineer, developer, and trader Hans Hannula. The indicator also helps traders to know when a pullback has ended and is about to reverse to continue another impulse swing in the trend direction. In an uptrend, when there is a pullback and the PFE reverses from a below-zero level, it could signal a buying opportunity to ride the next upswing.
They are powered, rounded, sqaure rooted, feed their past values and finally formed into an oscillator. The PFE indicator also helps assess the strength of a market trend. This means 100 indicates a strong uptrend, while a value of -100 indicates a strong downtrend. Accordingly, the higher the indicator value, the stronger the trend. This means 100 shows a strong uptrend, while a value of demonstrates a strong downtrend. This means that the market is relatively efficient, as the supply and demand are in a relative equilibrium at that point.
If it is far, the trend is strong and there’s an imbalance in the market — the market is inefficient. On the other hand, if the value is fluctuating around the zero line, the market is in consolidation and there is a balance between the supply and demand — the market is efficient. The PFE indicator measures market efficiency by showing which direction the price is trending and the strength of the price action.
This indicates a strong return relative to the amount of time the strategy is active, emphasizing its efficiency. By now, you know the basics of the indicator, so let’s show you a strategy that is complete with trading rules. In case the PFE reading is below zero, this suggests there is a bear trend. In case the PFE reading is above zero, this suggests there is a bull trend. The higher the value, the more efficient, ”trendier” the movement to the upside is.
Increasingly, participants recognize that Chaos Theory and nonlinear relationships are significant drivers of investment behavior. The signature characteristic of the PFE is its use of fractal geometry in determining how efficiently a security’s price is moving. The signature characteristic of the PFE is its utilization of fractal calculation in determining how efficiently a security’s price is moving. While some may be tempted to use the PFE alone to decide when to enter or exit a trade, that is not a smart way to trade. It is better to use it with other analysis tools to have a better understanding of the market structure and price movements.
And when the market is in a trend, it could also indicate the direction of the trend and its strength and efficiency. PFE values far above or below the zero line indicate that there is a trend, with values above zero indicating an uptrend and values below zero indicating a downtrend. In the chart below, we used the same default 10-period PFE and 5-period smoothing in a downtrend. Traders interpret PFE signals by checking the position of the indicator relative to the zero line. When the PFE is far above the zero line, it indicates an uptrend, and when it is far below the zero line, it indicates a downtrend. When the values are fluctuating around the zero line, the market is consolidating.
When in doubt, the further the PFE value is away from zero, the stronger and more efficient the given trend is. A PFE value that vacillates around the zero line could demonstrate that the supply and demand for the security are in balance and the price might trade sideways. Beginners can learn to use the PFE effectively by seeking trading education from the right sources. They would need to learn how the price moves and how indicators like the PFE try to use price data to distill out specific information about the market. Then, they should learn how to use the indicator alongside other tools to formulate a robust trading strategy and backtest it.
Algo traders can use it in combination with other tools to create automated trading systems. For instance, in an uptrend, when there is a pullback and the PFE reverses from a below-zero level, it could signal a buy to ride up the next upswing. Similarly, in a downtrend, a downward reversal of the PFE from an above-zero level after a rally (pullback) could signal a short-sell to ride down the next downswing. Yes, the PFE can be used for short-term trading strategies if used correctly.