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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.
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