Forex oscillator Elder rays
Some of the most technical indicators in forex market is the Elder-rays. Dr. Alexander Elder was the inventor of this, which is based on the concepts of bull power and bear power, the relative strength of bulls and bears in the market. Bear power is the bears’ ability to drive prices lower than current prices, or the current average consensus of value. As well as bull power measures the ability of market bulls to push prices above the average consensus of value, which is the actual price at which a particular stock happens to be trading for a given point in time.
The combinations of the Elder-rays are oscillators and trend following indicators, where 13-EMA (13 is the best period) is the main tracing indicator. The oscillators reflect the power of bulls and bears. It should be used three charts in Elder-rays: on one side, the price chart and EMA will be plotted, on two other sides bulls power oscillator (Bulls Power) and bears power oscillator (Bears Power) will be plotted.
We are most concerned with its slop, if in the interpreting is moving average. When it falls, the crowd is more bearish and when the slope rises, the crowd is becoming more bullish. The best choice you can make is to trade in the direction of the EMA. When bulls can not lift prices any higher, thereby reaching their maximum power, the high of the consensus of value occurs. And of course, when the low represents the lowest value to which the bears are capable of pushing the price, thereby reaching their maximum power. That’s how the low shown on the daily bar is the maximum power of bears for the day; on the weekly bar is their maximum power during the week, and so forth.
Bull power represents the capacity of bulls to push prices above the average consensus of value (price), thank to the measuring of the distance from the bar’s high to the EMA. When bulls are stronger and falls - Bull power rises. And when they are weaker, even becoming negative when they are utterly weak. As simple as that. Bear power, by contrast, is the capacity of bears to push prices below the moving average. As you already know the distance between the EMA and the low, that widens when the bears are weaker and narrows - they are stronger, gives this figure. The bulls have taken complete control, when the bear power is typically negative (so if it turns positive).
Elder-rays use both: individually and together with other methods. Bears and bulls power oscillators are applied for defining the moment of positions opening/closing. It is good to know that If using them individually, one should take into account that the EMA slope determines the trend movement, and position should be opened in its direction.
These positions should be opened:
* At the positive values of the Bears Power oscillator, it is better to keep back.
* The Bears Power oscillator increases after the Bulls divergence.
* The last peak of the Bulls Power oscillator is higher than the previous one.
* The Bears Power oscillator is negative, but increasing at the same time.
* There is an increasing trend (determined with the EMA movement).
There are 2 main conditions, that are needed to be in place for forex or stock traders to consider buying:
1) Bear power, as represented on Elder-Ray, should be negative but rising.
2) The weekly trend should be up
A worth exploring has the second condition, which is negative bear power. It is occurs, in the opposite condition, in a runaway uptrend, a dangerous market environment for trading despite the apparent strength of the trend. When bear power is negative but rising, bears are showing a bit of strength but are beginning to slip once again. The problem with buying in a runaway uptrend is that you are betting on the greater fool theory, which states that your profit will be realized only by eventually selling to somebody willing to pay an even higher price. By placing a buy order above the high of the last two days, your stop order will be filled only if the rally continues. You should also know - once you have gone long, you can protect your position with a stop below the latest minor low.
You can also use Elder-Ray to determine the best time to sell your position. By tracking the pattern of peaks and valleys in bull power, you can ascertain the power of bulls. By stacking the peaks in actual price against the peaks in bull power, you can determine the strength of the uptrend - if every new peak in price comes along with a new peak in bull power, the uptrend is safe. When prices reach a new high but bull power reaches a lower peak than that of its previous rally, the bulls are losing their power and a sell signal is issued.
Bullish divergences between bear power and price (average consensus of value) represent the strongest buy signals. If prices fall to a new low but bear power shows a higher bottom, prices are falling and bears become weaker. When bear power moves up from this second bottom, you can comfortably buy a larger number of shares than you typically would in your usual position. (See Getting Confirmation With The Momentum Strategy and Momentum Trading With Discipline.)
Signals to sell (in brief):
* The Bulls Power oscillator decreases leaving the Bears’ divergence.
* The last trough of the Bulls Power oscillator is lower than the previous one.
* There is a decreasing trend (determined with the EMA movement).
* There is a decreasing trend (determined with the EMA movement).
When the Bulls Power oscillator is negative, it is not re recommended to open short positions. Divergence between the Bears and Bulls Power as well as prices is the best time for trading. When bull power is positive but falling, the bulls have managed to grasp a bit of strength but are beginning to sink once again. If you place a short order below the low of the last two days, you receive an order execution only if the decline continues. You can then place a protective stop above the latest minor high.
If bull power is already negative, selling short is inappropriate because bears have control over the market bulls. If you short sell in this condition, you are effectively betting that bears have sufficient strength to push bulls even farther under water. Furthermore, as in the case discussed above, wherein the trader holds a long position during positive bear power, you are betting on the greater fool theory.
Well as we see the most popular method of estimating power struggle between the bulls and the bears are the Elder-ray indicators. And Alexander Elder, the technician, was the inventor and describer of this.
Remember, that Elder based the indicator on the following premises:
* The minimum price reflects the maximum power of sellers during the day.
* The maximum price reflects the maximum power of the buyers during the day.
* The moving average is the agreed-upon price between the sellers and buyers during a certain period of time.
The bear power is the difference between the minimum forex price and the 13-day exponential moving average (L-Ema). On the basis of these premises, Elder defines the bull power as the difference between the maximum price and the 13-day exponential moving average (H-Ema).