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. PFE readings below zero mean that the trend is down. 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.
What is the Polarized Fractal Efficiency indicator?
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.
Thus, this contributes to the movement of prices in a more linear, rather than up and down, movement, which indicates a stronger, more definite trend. PFE values range from -100 to +100, concerning the zero line, which distinguishes between positive and negative values.
This analytical tool is an extremely complicated type of price momentum oscillator obtained by dividing the change in the closing price of a more extended period by the average change in price for a shorter period. They are powered, rounded, sqaure rooted, feed their past values and finally formed into an oscillator. The user may change the input (close) and period length.
How to use the Polarized Fractal Efficiency indicator?
A trader can identify possible market reversal signals using the Polarized Fractal Efficiency indicator to create a basic trading strategy that can be implemented with one additional confirming technical indicator.
According to Hans Hannul, indicator values exceeding zero indicate the presence of a bullish trend. The higher the Polarized Fractal Efficiency, the more effective the upward price movement. A pattern directed upward at a right angle would be 100% effective and vice versa. Conversely, indicator values lower than zero indicate a falling trend; the lower the Polarized Fractal Efficiency, the more effective the drop in price.
A line pointing down at a right angle corresponds to 100% efficiency. Values equal to zero mean chaotic, trendless and ineffective price fluctuations.
The general forex strategy used in PFE uses an indicator to predict trend changes. The theory of the strategy is that as soon as reading PFE shows the maximum efficiency of price movement with readings of about +100 or -100, the movement or momentum of the price is likely to deteriorate and subsequently reverse.
What are Fractals?
In Forex, as well as other trading markets, traders use fractals in order to spot various patterns in price movements. A fractal is a five-candle price pattern that is plotted in the candlestick chart. There are two types of fractal indicators: up (bearish) and down (bullish). The fractal is indicating the possibility of a trend change. This is because fractals are essentially showing a “U-shape” in price. A bearish fractal has the price moving upward and then downward, forming an upsidedown U. A bullish fractal occurs when the price is moving down but then starts to move up, forming a U.
Polarized Fractal Efficiency trading strategy
The PFE generally indicates how trendy or overloaded a market is. 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. If the PFE reading is in proximity to zero, this means that market movement is choppy and less efficient.
The following is a trading strategy that uses PFE in conjunction with MACD to provide trading signals for trading reversals:
Polarized Fractal Efficiency buy strategy
- A trading signal appears when PFE indicator is lower than -90.
- Trade is entered only if, at the same time, PFE shows the required limit reading, and MACD shows reversal as well.
- The initial goal of profit is the 50 pips from the entry.
- The initial stop-loss order is placed 50 pips from the entry price into the trade.
Polarized Fractal Efficiency sell strategy
- A trading signal appears when PFE indicator is greater than +90.
- Trade is entered only if, at the same time, PFE shows the required limit reading, and MACD shows reversal as well.
- The initial goal of profit is the 50 pips from the entry.
- The initial stop-loss order is placed 50 pips from the entry price into the trade.
Polarized Fractal Efficiency conclusion
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.
Polarized Fractal Efficiency is a momentum indicator that helps to identify the trends and their extent of strength. You can use the extreme values like -90 and +90 to trade or you can only use zero line to trade. Like any other indicator, you may find false signals generated by PFE as well.
The Polarized Fractal Efficiency indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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