Bull Power and Bear Power Indicators Explained
Dr. Alexander Elder invented the Bull Power and Bear Power oscillators. They measure the ability of buyers (the bulls) and sellers (the bears) to influence the price in their favor, that is, above or below a baseline. The Elder-Ray Index is the product of the two indicators combined. Baselines are typically established by 13-period Exponential Moving Averages (EMAs).
The reasoning is straightforward: the market's condition is constantly shifting as bears turn into bulls and vice versa, resulting in a never-ending cycle of change. The indicators assist in tracking these changes and making trades based on them.
In a Moving Average, the price changes over time are smoothed, and a clear sense of overall market worth emerges. Bullish behavior tends to push prices up, and increased bullishness causes the slope of the MA to become steeper. Price declines if bears become dominant, causing a MA to slope downwards.
Bull power is a metric that quantifies the influence buyers have. It compares the higher prices with EMA. A bulls power histogram with a growing slope indicates that buyers are having their way against sellers and are keeping the price above the EMA. Using the same logic, we will know that the bears have won if the histogram is headed south below zero.
A histogram in the form of a 13-day EMA displays a 13-day period over which the Bears Power calculation is based. If the price stays below the EMA, it means that sellers have had their way, and this is signaled by the indicator staying below zero. Conversely, buyers' ability to keep the price above the MA would be reflected by a value greater than zero. There are no upper or lower limits to it, and its baseline value is zero.
Implementing the strategy
Although you can use the indicators individually, you can achieve better results if you use them in combination with one another. Additionally, the 13 EMA should be plotted on the chart.
By combining oscillators with a trend-tracking tool, you can improve the quality of entry signals. The Exponential Moving Average is a filter, and it highlights a trend, which traders may use to identify just those market movements that are in accordance with it.
The Elder-Ray trading rules are very straightforward. The EMA slope shows how the trend is moving, and you may only trade in the trend's direction. Bulls and Bears Power assist you in determining entry and exit locations.
A signal to buy requires the fulfillment of two primary conditions:
1. The 13-period EMA is pointing upwards; The beginning of an uptrend has already occurred or is just getting underway.
2. While the bears’ power is indicated as negative, it is increasing as the bars approach zero and higher.
Place a pending order when the signal comes a little higher than the height of the previous two candlesticks (see the green arrow on the chart below).
Put a stop-loss order behind the local low on the price chart and grab your profit when a significant resistance region is achieved or signs of a downward reversal emerge.
In the chart above, one of the possible exit points would be the time when the red candle closes below the EMA on February 12th.
For a signal to sell to be effective, two main conditions must be met:
1. The 13-period EMA is pointing downward; a downward trend has already begun or is just getting started.
2. The bulls’ power is indicated as positive, but it is declining. The bars are approaching 0 and below.
Following the appearance of the signal, place your pending sell order at a point that is a little lower than the lows of the previous two candlesticks (red arrows in the chart below).
Set a stop-loss behind the local high on the chart and grab your profit when a solid support level is achieved or once signs of an upward reversal emerge.
Bulls’ power and bears power assist traders in estimating the present balance of power between the buyers and sellers in a particular market and offer great profitable trading opportunities. You should employ them together with other indicators and technical analysis instruments to improve the effectiveness of your trading.
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