Elder Ray Index as an additional trend-tracking tool
The Elder Ray Index, also known as Bull Bear Power, is designed to track changes in the behaviour of market participants over time. Reading the index is relatively straightforward. When the indicator is near zero, there is no clear dominance of buyers or sellers. At the same time, the indicator can rise or fall from zero, indicating the dominance of one of the parties.
The author of the index is Alexander Elder. Several principles underlie the indicator:
1. Trade is a constant comparison between sellers and buyers. The former tries to raise prices, and the latter lowers them—the one who is more interested in the trade wins.
2. When market participants agree on the price, a moving average is formed. This indicator tries to balance supply and demand.
3. The maximum price indicates the maximum level available to buyers. It means their willingness to buy the asset even if the moving average is high.
These principles form the basis of Bulls Power, which takes the difference between the marginal cost and the moving average.
Index advantages
Bulls Power and Bears Power are oscillators. Traders usually use them to confirm other indicators. The best way to use the index is to work on trend markets.
Advantages:
– it helps to identify possible changes in trends;
– the index assesses the strength of the trend and the expected period of its dominance;
– it helps traders identify false signals and breakdowns;
– the index serves as a tool to find differences between market corrections and trends.
Bull/Bear Power are two different indicators on the trading platform. They are displayed in the form of a histogram, constructed with the horizontal zero line in mind. These indicators are located below the price chart.
The Elder-Ray index gives different signals, interpreted separately for Bears and Bulls. These include a buy signal, which for bears is below the zero line. Its columns diminish as they approach zero. The bulls indicator, on the other hand, is above this level, and its bars increase as they approach it.
At the buy signal, the bear force goes below zero. Its bars increase as it moves away from this line. The bulls’ power is above zero, decreasing towards it. The basis of the index is an exponential moving average, which consists of 13 periods.
It is worth noting that indicators are less reliable in short time frames. In this case, they will show a rapid change in trends and give false signals.
