Kaufman Adaptive Stop
period = 22 (5–200) • multiplier = 3 (1–10) • efficiency_period = 10 (2–50) Overview
The Kaufman Adaptive Stop is an advanced stop-loss management system developed by Perry Kaufman that dynamically adjusts stop distances based on market conditions. Unlike fixed percentage or point-based stops, this system adapts to both volatility and trend strength, providing optimal protection without sacrificing profitable positions. The core innovation combines the Efficiency Ratio (ER) concept with Average True Range (ATR) volatility measurement to create stops that automatically tighten during strong trends and widen during choppy markets.
The indicator calculates market efficiency by comparing directional movement to total volatility - when price moves efficiently in one direction (high ER), stops move closer to protect profits. When price action becomes choppy (low ER), stops automatically widen to avoid being triggered by market noise. This adaptive behavior is implemented through a ratchet mechanism that ensures stops only move in the favorable direction, never allowing them to move against the position. The result is a sophisticated risk management tool that significantly reduces premature stop-outs while maintaining protection against adverse moves, making it ideal for trend-following systems where the challenge is staying in winning trades while limiting losses.
Interpretation & Trading Signals
Stop Behavior & Market Conditions:
- Trending Markets: Stops move closer to price for better profit protection
- Choppy Markets: Stops widen to avoid noise-induced exits
- Long Positions: Stop line below price, follows upward but never down
- Short Positions: Stop line above price, follows downward but never up
Trading Applications:
- Stop Placement: Use as actual stop-loss orders
- Trailing Stops: Automatically trails favorable price movement
- Position Sizing: Wider stops suggest smaller positions
- Market Regime: Stop distance indicates market condition
Key Features & Benefits:
- Adaptive Distance: Adjusts based on efficiency and volatility
- Ratchet Effect: Only moves in favorable direction
- Noise Filtering: Reduces false stop-outs in ranging markets
- Trend Protection: Tightens during strong directional moves
Example Usage
Code examples will be available once the Rust implementation is complete.