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Polarized Fractal Efficiency PFE Strategy, Rules, Returns
The PFE does not directly assist in risk management, as it neither tells the trader how much position size to use, nor which level to keep their stop-loss order. However, the indicator can be used to formulate a reasonable trading strategy that can be backtested to find the most optimal risk management variables to use while trading. In the chart below, we used the default 10-period PFE and 5-period smoothing. You can see that the indicator now looks like a momentum oscillator. It spotted a good buy entry to ride the next upswing when it turned upward from below the zero level after a price pullback. How far away the value is from the zero line determines the strength and efficiency of the market.
The rules are simple, although the indicator is a bit difficult to calculate. The trading rules don’t work particularly well on stocks such as the S&P 500 and Nasdaq 100, but they have worked well on gold and Bitcoin. When applied to a chart, this indicator displays one plot in the same subgraph as the price data. In other words, data from backtesting can tell you the right amount to risk per trade, the appropriate position size per trade, and the right level for your stop-loss order.
The PFE compares fairly well with other trading indicators, as it shows several aspects of the price action. It tells you whether the market is trending or consolidating, and when the market is in a trend, it could also show the direction of the trend and its strength and efficiency. This is unlike other indicators that only tell you about the trend direction (moving averages) or the trend strength (like the ADX) alone. The PFE helps in trading and finance by showing whether the market is trending or consolidating.
Those who traded the PFE indicator in this particular example made $13.34 per share, or 6% ($221.02 sell price, $207.68 buy price). As with all technical indicators, traders should use PFE in conjunction with other forms of technical analysis. 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. Traders can utilize the PFE to see where a security they’re keen on is going.
- If the PFE reading is in proximity to zero, this means that market movement is choppy and less efficient.
- The PFE indicator measures market efficiency by showing which direction the price is trending and the strength of the price action.
- And when the market is in a trend, it could also indicate the direction of the trend and its strength and efficiency.
- A line pointing down at a right angle corresponds to 100% efficiency.
Can PFE be used for short-term trading strategies?
That is, the supply and demand are in equilibrium — the market is efficient. The polarized fractal efficiency (PFE) indicator is designed to measure the effectiveness of price movements. It is based on the fundamental axiom of geometry, that the most effective movement, in this case, the price movement, is linear. The PFE indicator measures the strength of a trend by its position relative to the zero line. As a general rule, the further the PFE value is away from zero, the stronger and more efficient the given trend is. A PFE value that fluctuates around xm forex review the zero line could indicate that the supply and demand for the security are in balance and the price may trade sideways.
Polarized Fractal Efficiency (PFE) – Strategy, Rules, Returns
One of them has sold 30,000 copies, a record for a financial book in Norway. If the market is predominantly range-bound, the indicator can show that too, as the values would cluster around the zero line. All information on The Forex Geek website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold The Forex Geek and any authorized distributors of this information harmless in any and all ways.
Polarized Fractal Efficiency conclusion
On the other hand, when the PFE is smooth and far above/below zero, then, the price is trending up/down as the case may be. In the chart below, we used a 30-period PFE with 10-period smoothing. It clearly shows an uptrend when the indicator stays above the zero level. Notice how smooth the indicator is because of the settings we used. In most platforms with the indicator, these data are automatically pulled by the platform to calculate the indicator.
Similarly, in a downtrend, a downward reversal of the PFE from an above-zero level after a rally (pullback) could be a signal to short the next downswing. The PFE is important for traders because it shows if the market is trending or consolidating. And it could also indicate the direction of the trend if present, as well as the strength and efficiency. When the PFE values are far above or below the zero line, it could mean that there is a trend — with values above zero indicating an uptrend and values below zero indicating a downtrend. So, in an uptrend, when there is a pullback and the PFE reverses from a below-zero level, it could be a signal to buy the next upswing. The general forex strategy used in PFE uses an indicator to predict trend changes.
Polarized Fractal Efficiency buy strategy
The term polarized fractal efficiency (PFE) refers to a technical indicator that is used to determine the price efficiency for an investment over a user-defined period. It fluctuates between -100 and 100 where the centerline is at zero. Traders can use the PFE to see where a security they’re interested in is headed. The price shows an upward trend if the PFE goes above zero and a downward trend if it drops below zero. The indicator was developed by author, engineer, programmer, and trader Hans Hannula.
When the indicator is fluctuating around the zero level, then, the price is considered choppy and consolidating — not trending. In the chart below, we used the same 30-period PFE and 10-period smoothing to find a downtrend. Notice how the indicator stayed mostly below the zero level as the price swings lower. Yes, the PFE can be used for different financial assets, as long as the price history and data are known. It doesn’t matter the market; the indicator can be used to identify the trend direction and gauge the strength of the trend. In contrast, PFE values that cluster around zero indicate a price consolidation, meaning that buyers and sellers are in equilibrium.
Its reason is richly caught through fractal calculation for financial market applications. Hannula’s beaxy exchange review and Mandelbrot’s research has brought the genuinely necessary study of turbulent systems to financial systems. Progressively, participants perceive that Chaos Theory and nonlinear connections are critical drivers of investment behavior. The future prospect of PFE in trading is mass adoption in algorithmic trading. The PFE uses a complex calculation, but even at that, many platforms are adding it to their systems.
In an uptrend, when there is a pullback and the PFE reverses from a below-zero level, traders take it as a signal to buy the next upswing. Similarly, in a downtrend, a downward reversal of the PFE from an above-zero level after a rally (pullback) signals traders to short the next downswing. The polarized fractal efficiency indicator was developed by author, engineer, programmer, and trader Hans Hannula. The idea was first mentioned in 1994 in the January issue of Technical Analysis of Stocks & Commodities magazine. Securities with a PFE greater than zero trend up, while a reading of less than zero indicates a downward trend.
A signal to close a position arises as the value of the indicator reaches its peak above zero. As a rule of thumb, traders should buy to cover all short positions after the indicator forms a new minimum. Traders also use the PFE as a momentum indicator to know when a pullback has ended and the price is about to reverse to continue another impulse swing in the trend direction.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! A line pointing down at a right angle corresponds to 100% efficiency. Values equal to zero mean chaotic, trendless and ineffective price fluctuations.
