Efficient Rank Correlation Trend-Follower

Family: trend_following · Regime: trending · Complexity: medium · Asset classes: FX, Equities, Crypto · Timeframes: H1, H4

Thesis

Market efficiency is cyclical; periods of high price displacement relative to noise (Efficiency Ratio) indicate institutional participation. By identifying the direction of this efficiency (TII) and entering on a statistical rank-based correction (RCI), we can capture the meat of a trend while avoiding the 'random walk' noise of low-efficiency regimes and the volatility shocks of news events.

Components

• Efficiency Ratio (Kaufman) (regime) — Serves as the primary regime filter to ensure the market is in a 'low-noise' trending state before allowing signals.
• Trend Intensity Index (TII) (direction) — Determines the macro-bias by measuring the cumulative distance of price from its 60-period (2*Length) mean.
• Rank Correlation Index (entry) — Identifies cyclical exhaustion and recovery within the trend using Spearman's Rank Correlation, providing the execution trigger.
• Relative Strength Index (RSI) (exit) — Standard momentum exhaustion exit; captures the 'blow-off' top of a trend-following swing.
• News Indicator NMNNFX (risk) — Acts as a volatility circuit breaker, preventing entries during high-impact fundamental shocks that invalidate technical signals.

Known failure conditions

• Efficiency Ratio stays below 0.20 for extended periods (systemic regime shift to range-bound mean reversion)
• RCI 'pins' at extremes (+/- 90) while price remains flat, indicating a breakdown in the price/time correlation logic.
• Frequent news events create high-slippage environments that negate the edge of the Efficiency Ratio filter.

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