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[surebet]

I discovered the Polarized Fractal Efficiency indicator about six months ago and so far, I have been impressed by its performance.

PFE measures how efficiently price moves between two points using fractal geometry, and plots that reading in the style of a traditional oscillator - and can be used as such i.e. when the reading comes up from the "oversold" line, (the lower fifth of the reading) a move upwards in price may be underway and vice versa coming down from the "overbought" level.

I put these two terms in parenthesis as PFE is not really a measure of how overbought or oversold a market is, rather, it reflects how efficiently price is moving in a particular direction, assigning a more extreme reading the more "straight line" a price is moving in a direction. As such, the higher the reading is towards extreme, the more trendier the market and when its stuck in the middle (indicating that price movement is squiggly and not straight line) then this signals a choppy market. The reading hooks just after a significant movement is broken by a price move in the opposite direction (depending on what period setting is used).

It works on all time frames (using different period settings), but as usual, the higher time frames have less "noise" and thus the signals are more reliable. Attached I have the last two weeks GBP/USD chart for clarification purposes. Notice that it performs equally well in a trending market (as has been the case this week), as well as in a flat market (as was the case last week)

I don't find alot of material written up about it, hence this is one reason why I started this thread. It would be interesting to know what others have found using it.

[surebet]

In the chart below I have shown some uses of the PFE when day trading.

I have been emailing Al Larson, the indicators inventor, and he advised me to set the period to 40 on the one minute charts.

Now to clarify this. During the Tokyo and London sessions I have found that 40 is ok, but in the fast moving New York session (8am till noon E.T.) a faster setting (I use 20) is more effective. Again, trial and error with your particular instrument and trading session is important.

The best signal comes when the PFE reading comes up sharply and hits (or slightly pierces) the upper/lower bands and then just as quickly bounces off in the opposite direction, a PFE slingshot.

When day trading and using the PFE, it's advisable to wait for the reading to go through the opposite band before making an entry - otherwise you could get whipsawed if the reading renters back in the same direction. For example, when trading of half or 1 hour charts a buy is made when PFE goes past 20 from below to above, but when day trading the buy entry would be made when waiting for the reading to continue past 80. Sometimes, being more aggresive, you may decide to wait for the PFE to only pass the centreline, before making an entry.

[surebet]

Attached is another chart showing the PFE sling (as described in my previous post). Enter as soon as the indicator hooks, characterized by the elongated V shape that the indicator makes. Set the take profit anywhere from 10-20 pips and the stop to half that number.

[surebet]

Here is a sling and what I call a Double PFE sling. The indicator hooks once and then immediately hooks again in the opposite direction. This usually precedes a more powerful move. Perhaps this is a close relative to what the Woodies CCI system calls a 'shamu' or a 'famir'. This chart and the previous 2 charts all occured within the same trading session.

[surebet]

An hour or so later and another PFE sling on the Euro.

I also just glanced at the yen chart and there were another three successful slings and a double sling that broke even, all in the last 7 hours.

I hope you get the idea by now.

[sherm]

Hi
Just read your new thread on PFE and found it quite interesting. Is the indicator available for download?
Sherm

[surebet]

Hi Sherm,
Yes, if you are a CMS (vt trader) user you can go to:
http://forum.vtsystems.com/index.php
and download the PFE from the new indicators section.

For day traders who want to catch the trend (as oppossed to scalping), I have attached the following chart, again, as an example of what the PFE can do. As noted in an earlier post, I like to use a faster setting for the New York session trading time.

I don't want to clutter this thread too much with all of my charts, but in all honesty a picture tells a thousand words, as it is difficult to explain these concepts without some sort of visual reference.

[surebet]

Another example, this time showcasing these v shaped 'sling' patterns on the 15 minute charts. What I am looking for is a sharp, v-shaped pattern. This indicates that rapid momentum is being built for a move in one direction by initially going in the reverse direction, like pulling back a rubber band before releasing it.

[surebet]

The PFE is also an excellent indicator when it comes to spotting divergence. Divergence occurs when the indicator fails to reflect the price pattern, a sign of a weak trend and a likely move by price in the opposite direction.

In the 5 minute Euro chart below, you can see three instances when the PFE signalled a "sling" yet price was relatively flat. The subsequent signal in these three instances was profitable.

In the third trade, the PFE reading has gone well below the outer band and perhaps it does not strictly qualify as a "sling", but i've included it anyway to illustrate how divergence may develop. Trading is not always an exact science - we are dealing with patterns that are not always exactly the same or don't measure up to the what the "textbook" tells us to do.

One final note i'd like to make is that in the preceeding few charts we have been examining the Euro in the same trading session, using three different time frames (1min, 5min, 15 min.) and yet it is interesting to see how the three all mesh together. For example, the 5.30 am - 6.30 am move was a sling (on the 15 minute chart),a double sling (as we saw on the 1 minute chart) and showed up as divergence on another (the 5 minute chart).

[surebet]

The Turbo PFE can be useful to tell us when to take profits (if we are not using a limit stop to take profits) when the PFE would keep you in, as well as confirming (or disagreeing with) what the PFE is telling us. The period selected for it should be about half of what you have selected for the PFE (On 5 min. charts, the period for the Turbo PFE that I use is 5 and the PFE is set to 8).

Anatomy of a trade

In the first two trades in the chart below, the Turbo hooked before the PFE did, and although we are not taking a counter position using that signal, we are nevertheless able to take profits early (before most of it gets evaporated by a counter move). Some days, such as this one are taxing to trade, and one needs all the pips one can get!

The 3rd, 4th and 5th trades were interesting. We can see that a head and shoulders formation is on its second shoulder, so we enter our third trade to see how high up its going to go. The high, 4 bars later, fails to break the high formed on the head, and this coupled with a hook pattern on the PFE makes us take the trade down. Not only that but there was a 150 pip runup in price during the London session, so surely this is a partial retracment of that.....

3 bars later and the price has come back to where we got in, the PFE has hooked, and so a double sling is on.....

2 bars after that and the price again reverses back to our buy in price, the PFE has hooked again, and shorely its the second attempt of the right shoulder to come down again......but wait, the Turbo PFE is still slinging up, our short term momentum upwards is not broken yet......what to do.......?

The following bar is of no help either as we take some heat when the price goes down below our buy in price. Steady on though, this is what can take years to perfect, sitting tight in the face of adversity. The next bar, success, up she goes and the Turbo PFE gets us out 5 bars later.....what a ride! Although we got out early (we could have gotten back in when the Turbo hooked two bars later), we are on balance able to protect profits in a choppy market.

[sherm]

Hi
Thanks surebet for your very prompt reply. I have VT Trader and will go over your charts very carefully in the morning (I am retired and have plenty of time).
Your chart postings and explanations are great. The best tutorial I have ever seen in these groups. Please don't stop.
Sherm

[surebet]

Dear Sherm,

Thank you for your interest, i'll try my best to keep it coming.

Heres another chart.

[surebet]

Heres another chart, this time showing how one situation, ie a sling, flows into another (a double sling), and we keep the trade going until our target is hit.

[surebet]

The key to scalping is to have a discount broker, less pips in their pockets means more in yours.
Heres a setup that needed only 5 minutes to work.

[surebet]

Another chart (this time a 5 minute GBP) showing how powerful it is to enter into a sharp PFE sling pattern. If your are trading more than one contract you can stagger your exits each time the Turbo PFE flicks out of the extreme boundary.