The Efficiency Ratio (ER) was first presented by Perry Kaufman in his 1995 book ‘Smarter Trading‘.
It is calculated by dividing the price change over a period by the absolute sum of the price movements that occurred to achieve that change.
The resulting ratio ranges between 0 and 1 with higher values representing a more efficient or trending market.
The ER is actually very similar to the (CMO) presented by Tushar S. Chande in ‘The New Technical Trader‘ (1994).
The difference is that the CMO takes into account for market direction but if you take the absolute CMO and divide by 100 you you get the Efficiency Ratio.
A measure of a trends strength can be very useful as some strategies work best on a trending market and some in a range bound market.
Likewise different moving average lengths will perform better depending on the market type at that time.