|
Polarized Fractal Efficiency
Description
The Polarized Fractal Efficiency indicator (PFE) was developed by
Hans Hannula. It was introduced in the January 1994 issue of
Technical Analysis of Stocks & Commodities magazine. As an
engineer, programmer, and trader with over 30 years market
experience, Mr. Hannula developed a unique approach to applying the
laws of fractal geometry and chaos to the markets.
Interpretation
Drawing upon the pioneering works of mathematician Benoit Mendelbrot,
Mr. Hannula developed an indicator to gauge the efficiency that
prices travel between two points in time.
The more linear and efficient price movement, the shorter the
distance the prices must travel between two points. The more
"squiggly" the price movement, the less efficient it's travel.
The primary use of the PFE indicator is as a measure of how trendy
or congested price action is. PFE readings above zero mean that the
trend is up. 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 around zero indicate
choppy, less efficient movement, with a balance between the forces
of supply and demand.
Several interesting phenomenon have been observed by Mr. Hannula:
- Indexes (particularly the OEX) tend to have a maximum PFE
(both plus and minus) of about 43%.
- The middle region (around zero) is a balance between supply
and demand and therefore a congestion point.
- A hooking pattern often occurs right before the end of an
efficient period. This pattern occurs when the PFE appears to
have maxed out, turns in the opposite direction towards zero,
and then makes one last attempt at maximum efficiency. Trades
can be entered in the opposite direction, with a stop just
beyond the extreme of the hook. Stay with the trade all the way
to the other extreme, unless it slows around the zero line. If
it slows around zero, exit the trade and wait for a new maximum
efficiency entry.
|
