PFE

• Source: The data source for the calculation.
  • Open Price: Uses the opening price of each period.
  • High Price: Uses the highest price of each period.
  • Low Price: Uses the lowest price of each period.
  • Close Price: Uses the closing price of each period.
  • Volume: Uses the trading volume of each period.
  • Weighted: A weighted price is typically calculated as (High + Low + Close + Close) / 4.
  • Typical: Calculated as (High + Low + Close) / 3.
  • Median: Calculated as (High + Low) / 2.
• Periods: Field to input the number of periods for the calculation
• Smooth: This parameter determines the smoothing period applied to the PFE values to reduce noise and provide a clearer trend signal.

Style:

• Customizable options for visual representation (line color, style, etc.)

Polarized Fractal Efficiency (PFE) indicator is a tool in technical analysis that evaluates the efficiency and direction of market price movements. Created by Hans Hannula, the PFE helps traders gauge trend strength and direction by examining the interplay between price changes and time. Unlike many traditional indicators that focus solely on price or volume, the PFE provides a unique perspective by incorporating the concept of fractal geometry, which measures the complexity and efficiency of price patterns.

How PFE Works: The PFE indicator measures the efficiency of price movements by comparing the direct distance between two points (the start and end of a price move) to the actual path the price takes between those points. This comparison yields a ratio that reflects how efficiently the price has moved from point A to point B.

Key Components of PFE:

1. Fractal Dimension: At the heart of the PFE lies the concept of fractal dimension. This measure captures the complexity of a price pattern. It does so by contrasting the straight-line distance between two points with the actual distance covered along the path. A fractal dimension close to 1 indicates a straight-line movement, while a higher fractal dimension indicates a more convoluted path.
2. Efficiency Ratio (ER): The PFE calculates an efficiency ratio that measures the efficiency of price movements. The ratio is obtained by dividing the direct distance (straight-line distance) by the total distance traveled by the price. The result is then scaled to provide a value oscillating between -100 and +100.
3. Polarization: The PFE includes a polarization aspect, which assigns a positive or negative value to the efficiency ratio based on the direction of the price movement. Positive values indicate an upward trend, while negative values indicate a downward trend.

PFE Formula: The PFE is typically calculated using the following steps:

1. Calculate the direct distance (DD) between the current price and a price 'n' period ago.
2. Calculate the total distance (TD) traveled by the price over the same period.
3. Compute the Efficiency Ratio (ER) as follows: ER = (DD / TD) * 100
4. Apply polarization to the ER to determine the PFE value:
   • If the current price is greater than the price 'n' periods ago, the PFE is positive.
   • If the current price is less than the price 'n' periods ago, the PFE is negative.

Application of PFE:

1. Trend Identification: The PFE helps traders identify the strength and direction of trends. Positive PFE values suggest an upward trend with high efficiency, while negative values indicate a downward trend with high efficiency.
2. Signal Generation: The PFE can be used to generate trading signals. For example, crossing above a specific threshold (e.g., 50) might signal a strong uptrend, while crossing below a threshold (e.g., -50) might indicate a strong downtrend.
3. Divergence Analysis: Traders can use PFE to identify divergences between the indicator and price action. A divergence might signal a potential reversal or weakening of the current trend.
4. Filtering Noise: By emphasizing the efficiency of price movements, the PFE helps to filter out market noise. This makes it easier for traders to identify significant trends and patterns.

Limitations:

• Lagging Indicator: Like many technical indicators, the PFE may lag behind actual price movements, potentially leading to delayed signals.
• Complexity: The concept of fractal efficiency and the calculation of the PFE may be complex for some traders to understand and implement.
• Sensitivity to Parameters: The effectiveness of the PFE is significantly impacted by the selection of parameters. For instance, the number of periods used in the calculation is a crucial factor.

Conclusion:The Polarized Fractal Efficiency (PFE) indicator is a powerful tool for analyzing the efficiency and direction of price movements. By incorporating the principles of fractal geometry, the PFE provides a unique perspective on market trends, helping traders identify the strength and direction of trends with greater precision. While it may have some limitations, such as being a lagging indicator, the PFE can be valuable to a trader's toolkit when used with other technical analysis tools and strategies.