Efficiency Ratio (ER) Indicator Explained

Perry Kaufman's Efficiency Ratio (ER) divides the net distance price traveled over the window by the total path length it took to get there. A market that went 100 pips up in a straight line scores 1.0; one that flailed 500 pips of path for the same 100 pips of progress scores 0.2.

How It Works

• |close − close N bars ago| ÷ Σ|bar-to-bar changes| over the window.
• 1.0 = perfectly efficient move; near 0 = pure churn.
• This is the exact adaptive engine inside KAMA.

How to Trade It

ER is the cleanest one-number answer to 'is this market worth trend-trading right now?' Gate trend systems on ER above ~0.3, switch to mean-reversion logic when it sits low, and watch for ER rising from the floor — often the first bars of a new trend.

Building It in Setup.Cash

Add Efficiency Ratio (ER) in the strategy builder — the length input controls its sensitivity — and use its value in any entry, exit, or filter condition. You can also combine it with other tools in the Indicators Lab or via the AI indicator generator. See CTI for the correlation-based alternative. For the full category overview, see the advanced trend library guide.

Trend tools reward patience: pick one, pair it with a volatility or regime filter, and backtest before trading it live.