Elder Ray Index

Why not give the Elder Ray Index some consideration if you’re in need of an indicator that will assess bullish and bearish strength in a given market?

  1. What you can do with the Elder Ray Index

  2. Conclusion

 

The Elder Ray Index shows how much purchasing and selling strength there is in any given market. It features both a bearish and a bullish element, and these are plotted as two individual indicators, named “bull power” and “bear power” respectively.

Bull power relates the daily peak to an n-period exponential moving average, whereas bear power illustrates how the daily low and an n-period exponential moving average relate to each other.

Bull Power = Daily High – EMA (of n-periods)

Bear Power = Daily Low – EMA (of n-periods)

What you can do with the Elder Ray Index

Market players frequently use bull and bear power in conjunction with each other, so they can pinpoint those moments when both kinds of signs crop up.

For instance, you might take out a long position under these circumstances:

1) The bear power amount is negative but heading up (i.e., becoming more bullish)

2) The bull power amount is going up (i.e., becoming less bearish)

This makes it an intrinsically trend-following approach.

You might take a short position if this happens:

1) There’s a positive bull power number, but it’s dropping (i.e., becoming more bearish)

2) The bear power’s amount is going down (i.e., becoming more bullish)

To corroborate the trend, a trader might also plot an exponential moving average (EMA) to cover the same period covered by the bull and bear power indicators in order to establish a corroboration of the apparent trend. An EMA with a positive slope makes bullish trades more appealing, and an EMA with a negative slope makes bearish trades more appealing.

 

Conclusion

The Elder Ray Index of technical analysis quantifies purchasing and sales strength in a market, and using its measures called bull power and bear power it’s possible to utilize a rules-based system to create trade signals. It’s best to set their periods at the same level so that comparisons are on a par with each other. You should make sure to do the same thing when using an exponential moving average to trade in the same direction as the prevailing trend too.

Be aware that you should only use the Elder Ray Index on day charts or longer. It won’t work with anything that’s more brief.