The Directional Efficiency Ratio (DER) is a powerful tool for traders looking to gauge market trends effectively. Introduced by Perry Kaufman in his 1995 bestseller, "Smarter Trading," this indicator offers a fresh perspective on how price movements can signal market efficiency.
So, what exactly is the DER? It's calculated by taking the price change over a specific period and dividing it by the total absolute price movements that led to that change. The result is a ratio that ranges from 0 to 1. A higher ratio suggests a more efficient or trending market, which can be a goldmine for traders aiming to capitalize on price movements.
Now, here’s where this version of the Efficiency Ratio stands out. Unlike the original, which simply measures price changes without indicating direction, the DER provides insights into both the trend and direction of price movements. This enhancement allows traders to assess whether the market is trending or ranging, making it a dual-purpose tool.
To further fine-tune your analysis, the DER includes a smoothing option. By applying mild smoothing, you can easily identify trends while minimizing false signals. If you prefer to keep things straightforward without any smoothing, just set the smoothing period to 1 or less.
Related Posts
- Hourly Buffers for Data Collection in MetaTrader 5: A Simple Guide
- Unlocking MetaCOT 2: Your Ultimate CFTC Indicator Toolkit for MT4
- Mastering the MACD Candle Indicator for MetaTrader 4
- Visualize Current Trends Across All Time Frames with This MetaTrader 4 Indicator
- Mastering the Two Pole Smoothed Ehlers Oscillator for Better Trading