Bears and bulls power indicator explained
In any type of market, whether it’s foreign exchange, commodities
, or anything else, there are two major forces that determine the price on a product/service: demand and supply. In trading, the sides that represent demand and supply are called “bulls” and “bears” respectively.
Bulls are interested in buying an asset, and as any regular buyer, they want to get the product/service as cheaply as possible. bears are interested in selling an asset, and they want to do that as extensively as possible. The two sides are this constant competition of interests, which ultimately leads to a balanced price that is more or less acceptable for both bulls and bears.
Forex bulls and bears behave the same way. To actually measure the strength of the signals, that is, how successfully bulls and bears manage to influence prices at their advantage, the Russian-America professional trader, Dr. Alexander Elder created an indicator called the Elder-Ray.
The second name “Ray” hints to the indicator’s ability to see through the surface of the market prices, just like an X-ray does. Using it, traders can detect the potential strength of an uptrend/downtrend and make trading decisions accordingly.
The Elder-Ray indicator incorporates bulls and bears power oscillators to detect the trend - whether a price is in an uptrend or a downtrend. On top of that, this indicator also uses the Exponential Moving Average (EMA) indicator, which is also a trend-detecting tool. These individual elements together give out various signals to the traders.
Bulls power derives from the subtraction of an exponential moving average (usually, the time frame is 13 days) from a high price of an asset. Bear power derives from the subtraction of the EMA from a low price of an asset. Then, the two powers are put as histograms in the bar chart
Then, a 13-day EMA is taken as a baseline that is going to measure the strength of the bulls and bears powers. By interpreting the individual movements of the 13-day EMA and bulls and bears power histograms, as well as the positioning of these elements with respect to one another, the Elder-Ray indicator gives out signals as to when to buy or sell an asset.
Now, let’s talk about how traders actually interpret the movements of Bulls and Bears signals. In a combination of a 13-day EMA, the Elder-Ray indicator gives out a signal to buy an asset when the following conditions are met:
- The EMA is in an uptrend (increasing)
- The Bears Power is negative but is increasing as well
These two trends show that: a. The average price has been increasing for the past 13 days and b. The sellers’ (Bears) position is at its lowest point and is starting to increase. Therefore, it is the best time for a trader to buy an asset.
Conversely, the Elder-Ray indicator gives out a signal to sell an asset when the following conditions are met:
- The EMA is in a downtrend (decreasing)
- The Bulls Power is positive but is decreasing as well
What these two trends show is that: a. The average price of the asset has been going down for the past 13 days, and b. The buyers’ (Bulls) position is at its weakest point but is slowly gaining strength. Therefore, this is the best time to buy an asset.
These two main conditions are absolutely essential to the detection of a trend and for the Elder-Ray indicator to be precise in its signals.
The buyers and sellers strength indicator in MT4
When it comes to using the Bulls Bears power indicator MT4 is one of the simplest pieces of software for it. They are available to the platform as a default, therefore, adding them to a chart is quite simple.
All traders have to do is click the “Insert” menu at the top-right corner, go to the “Indicators”, choose “Oscillators,” and then put both “Bull Power” and “Bear Power” in the chart. While these indicators can be put individually, it is much more effective to use them together, as was the original intention of Dr. Elder.
And, alongside those two indicators, it’s also important to plot the 13-day Exponential Moving Average on the chart. This way, the Elder-Ray index will work at its best and the signals will be more accurate.