What Is The Polarized Fractal Efficiency Indicator & How To Trade With It

Polarized Fractal Efficiency

Hans Hannul first introduced polarized fractal efficiency indicator in the January 1994 edition of “Technical Analysis of Stocks & Commodities”. The trading indicator’s purpose is to identify the degree of effectiveness of price movements and determine how chaotic or directional price changes were in the recent past.

What is the Polarized Fractal Efficiency indicator?

The polarized fractal efficiency (PFE) indicator is designed to measure the effectiveness of price movements. It is based on the fundamental axiom of geometry, that the most effective movement, in this case, the price movement, is linear.

Thus, this contributes to the movement of prices in a more linear, rather than up and down, movement, which indicates a stronger, more definite trend. PFE values ​​range from -100 to +100, concerning the zero line, which distinguishes between positive and negative values.

Polarized Fractal Efficiency on chart
Polarized Fractal Efficiency on chart

This analytical tool is an extremely complicated type of price momentum oscillator obtained by dividing the change in the closing price of a more extended period by the average change in price for a shorter period.

How to use the Polarized Fractal Efficiency indicator?

A trader can identify possible market reversal signals using the Polarized Fractal Efficiency indicator to create a basic trading strategy that can be implemented with one additional confirming technical indicator.

According to Hans Hannul, indicator values ​​exceeding zero indicate the presence of a bullish trend. The higher the Polarized Fractal Efficiency, the more effective the upward price movement. A pattern directed upward at a right angle would be 100% effective and vice versa. Conversely, indicator values ​​lower than zero indicate a falling trend; the lower the Polarized Fractal Efficiency, the more effective the drop in price.

Polarized Fractal Efficiency zero line
Polarized Fractal Efficiency zero line

A line pointing down at a right angle corresponds to 100% efficiency. Values ​​equal to zero mean chaotic, trendless and ineffective price fluctuations.

The general forex strategy used in PFE uses an indicator to predict trend changes. The theory of the strategy is that as soon as reading PFE shows the maximum efficiency of price movement with readings of about +100 or -100, the movement or momentum of the price is likely to deteriorate and subsequently reverse.

Polarized Fractal Efficiency oversold-overbought
Polarized Fractal Efficiency oversold-overbought

Polarized Fractal Efficiency trading strategy

The following is a trading strategy that uses PFE in conjunction with MACD to provide trading signals for trading reversals:

Polarized Fractal Efficiency buy strategy

  • A trading signal appears when PFE indicator is lower than -90.
  • Trade is entered only if, at the same time, PFE shows the required limit reading, and MACD shows reversal as well.
  • The initial goal of profit is the 50 pips from the entry.
  • The initial stop-loss order is placed 50 pips from the entry price into the trade.
Polarized Fractal Efficiency buy setup
Polarized Fractal Efficiency buy setup

Polarized Fractal Efficiency sell strategy

  • A trading signal appears when PFE indicator is greater than +90.
  • Trade is entered only if, at the same time, PFE shows the required limit reading, and MACD shows reversal as well.
  • The initial goal of profit is the 50 pips from the entry.
  • The initial stop-loss order is placed 50 pips from the entry price into the trade.
Polarized Fractal Efficiency sell setup
Polarized Fractal Efficiency sell setup

Polarized Fractal Efficiency conclusion

Polarized Fractal Efficiency is a momentum indicator that helps to identify the trends and their extent of strength. You can use the extreme values like -90 and +90 to trade or you can only use zero line to trade. Like any other indicator, you may find false signals generated by PFE as well.

The Polarized Fractal Efficiency indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Polarized Fractal Efficiency indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Polarized Fractal Efficiency indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Polarized Fractal Efficiency indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Polarized Fractal Efficiency indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!