Market Efficiency & Regime Persistence Measures

What are Market Efficiency & Regime Persistence Measures?

Market efficiency and regime persistence measures are statistics that score how directionally efficient price travel is and how long directional regimes tend to last. The best known is Kaufman's efficiency ratio: the absolute net change over a window divided by the sum of the absolute bar-to-bar changes inside it. It is bounded between 0 and 1: near 1, price traveled in nearly a straight line; near 0, it churned and canceled itself out. Monotonicity counts (the fraction of bars closing in the same direction), run-length statistics, and trend-duration profiles belong to the same family.

Their job is regime classification. Trend systems tend to earn in efficient stretches and bleed in churn, so quantifying travel efficiency turns "is this trending?" into a measurable input rather than a feel. They overlap with the Hurst exponent and the Choppiness Index but are generally simpler, faster to compute, and usable on shorter windows.

How traders use it

• Gating entries: trend and breakout logic enabled only above an efficiency threshold, with range tactics such as fades and band reversion taking over below it.
• Driving adaptation: the efficiency ratio is the engine of KAMA-style moving averages, which speed up when travel is clean and flatten in chop.
• Setting expectations: the historical distribution of trend durations on an instrument gives base rates for how long regimes have lasted, informing holding periods and trailing decisions without pretending to forecast the next one.