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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:
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Indexes
(particularly the OEX) tend to have
a maximum PFE (both plus and minus)
of about 43%.
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The
middle region (around zero) is a
balance between supply and demand
and therefore a congestion point.
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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.
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