The pfe uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.
The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.
This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.
I read the pfe in two ways: The trend (is it going up or down), and the location relative to the zero line and two outlying lines, the +50 and the -50.
I think of the trend as confirmation, and the location as the relative age of the trend. The latter is a way of asking, how much of the move has already occurred?
The pfe has these advantages over the on-balance volume: 1) The pfe gives a clearer trend reading; the obv lends itself to ambiguous readings; 2) The pfe can be used with forex, which has no volume and therefore no obv.
PFE Trading Rules
These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.
First, I pick the signal that I'm going to use. Generally, I favor Person’s Proprietary Signal (pps), but the Heikin-Ashi candlestick, the parabolic sar and the macd are also candidates.
Generally, the Heikin-Ashi candlestick is the quicker the change phases, followed by the pps, the parabolic sar and the macd. But not always.
When the signal is in bull phase, enter when the polarized fractal efficiency (pfe) turns to an uptrend (pfe trend). A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below -50, and greater strength but less upside potential when the pfe location is above +50.
When the pps in in bear phase, enter when the pfe trend turns down. The set up has less strength but greater downside potential when the pfe loc is above +50, and greater strength but less downside potential when the pfe loc is below -50.
The target is the weekly Person’s Pivot level in the direction of the trend, determined by the pps.
The question is how to treat the pfe when it has flatlined at the top of its range, above 100. My preliminary observations are that the price by then has had a large upward run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.
This is something that I’ll figure out as I go along.
On the charts, the signals use this color coding:
Key to the pfe
|pfe loc||above +50|
|0 to +50|
|below 0 to -50|
The signals are binary: Green for bull phase and red for bear phase, except for the Heikin-Ashi candlesticks, which move to bull phase (green) with two rising candlesticks in a row, bear phase (red) with two consecutive falling candlesticks, and neutral (yellow) with a single candlestick in either direction.
One other change on the analytical charts: I've moved the Heikin-Ashi candlesticks to the signals section. It had previously, inappropriately, been placed in the confirmation section.