See Beneath the Surface of the Market with the Bears and Bulls Power Indicator
Reading time: 9 minutes
Many oscillators attempt to measure how much buying or selling power lies behind price moves in a financial market. Many do this by means of a single indicator that gauges momentum, both bullish and bearish. Some well-known indicators that work this way include the Relative Strength Index, the Force Index, and the Money Flow Index.
There is another indicator though, called the Elder-Ray Index, that attempts to gauge bullish and bearish forces in the market by using two separate measures, one for each type of directional pressure. The technique was developed by Alexander Elder, and the two indicators involved are called Bulls Power and Bears Power. Elder named the indicator after himself and X-rays, seeing a commonality between the revealing abilities of an X-ray scan and his indicator's ability to see below the surface of the market.
The Bears Power indicator attempts to measure the market's appetite for lower prices.
The Bulls Power indicator attempts to measure the market's appetite for higher prices.
Both do this by making a comparison to a third measure. This is a guide helping us see where the consensus of value lies in the market. Typically, a 13-period exponential moving average (EMA) is used for this base line of value.
What do we mean by consensus of value?
Elder argued there are three types of traders:
- the undecided who sit on the sidelines.
A trade in the market is a deal between a buyer and a seller. Elder characterised this as a momentary consensus of value between buyers, sellers, and the undecided. This momentary consensus can change at any time, of course, as undecided traders convert to buyers or sellers. Patterns of price movement describe the dynamics of the struggle between bulls and bears.
A moving average shows us the average consensus of value for the window of observation over which the prices are averaged. If bulls gain the upper hand, prices rise and the slope of a moving average will be upward. If bears gain the upper hand, prices fall and the slope of a moving average will be downward.
The Elder-Ray technique combines elements of both trend-following indicators and oscillators. The exponential moving average that it uses is a trend-following measure. This operates as a kind of filter in the technique, allowing only trades in the direction of the trend. The Bulls Power and Bears Power elements are oscillators. Using all three together should, in theory, allow you to decide whether bulls or bears are stronger and position yourself with the dominant force in the market.
Let's look at the numbers behind the three indicators that make up the Elder-Ray.
Calculating Bears and Bulls Power Indicators
The starting point is always the point of comparison, which is an EMA of the price. The value recommended by Elder was a 13-day EMA of closing prices. Elder argued that the high price of a bar represents the upper extent of bullish strength and that comparing this level to the EMA gives a general yardstick of bullishness.
In other words:
Bulls Power = High - EMA
Likewise, the low price of a bar represents the maximum extent of bearish strength in that period. By comparing the low to the EMA gives us a measure of general bearish strength in the market.
In other words:
Bears Power = Low - EMA
More often than not, we would expect the high of a period to be higher than the 13-day EMA. At such times, Bull Power is positive. Sometimes, however, the high of a period may drop below the EMA and at such times, Bull Power turns negative.
In the same vein, we would more often than not expect the low of a period to be below the 13-day EMA. At such times, Bear Power is negative. There will be occasions, though, when the low rises above the 13-day EMA; when this happens, Bear Power becomes positive.
Let's take a look at Bears Power and Bulls Power in MetaTrader 4.
Using the Bears and Bulls Power Indicators in MetaTrader 4
Bears Power and Bulls Power are separate indicators in MT4. You will find them both contained within the Oscillators folder in the Navigator directory, as shown in the screenshot below:
Image source: MetaTrader 4 platform, 4 September 2017
You can use them individually if you choose, but to set them up for use in the way originally designed by Alexander Elder, we need to add both of them along with a 13-period EMA.
You can see how this set-up looks below, where I have added the three indicators to an hourly GBP/USD chart:
Image source: MetaTrader 4 platform, price data from Admiral Markets, hourly GBP/USD chart, 28 August 2017 to 4 September 2017
The 13-period EMA is shown on the main price chart as a green, dotted line. Below that, we have the histogram for Bears Power. Notice how it spends a large portion of its time below the zero line. The bottom histogram is Bears Power. Notice how it spends a major portion of its time above the zero line.
So how do we use this to trade?
Trading with the Bulls and Bears Power Indicators
The trading rules for the Elder-Ray system are fairly simple.
The slope of the EMA suggests the direction of the trend, and you are only permitted to trade in the same direction as the trend. Bulls Power and Bears Power help you identify entry and exits points.
There are two mandatory conditions to allow a buy trade. These are:
- The market is in an uptrend, as indicated by the slope of the EMA;
- Bears Power is below zero, but has been moving higher.
We can also add two optional conditions. These are:
- The most recent peak in Bulls Power is greater than the peak prior;
- There is bullish divergence in Bears Power and price.
Bullish divergence in Bears Power should identify optimal opportunities for entry. Bullish divergence in this case being when prices are setting new lows, but Bears Power fails to make new lows. Furthermore, the exit signal is given when prices reach a new high, but Bulls Power fails to reach a new peak. This is a sign that the influence of bulls is starting to wane in the market.
The rules for shorting the market are similar to the rules for buying:
- Only open a short position when the EMA signifies a downtrend;
- You need Bulls Power to be in positive territory, but declining in value.
Once again, we can add two optional conditions. These conditions are:
- The most recent low in Bears Power is lower than the prior bottom;
- Bulls Power is falling from a bearish divergence.
Bearish divergence here means prices rallying to a fresh high, but Bulls Power only attaining a lower peak. This weakening in bullish sentiment suggests prices are continuing to rise through inertia only, and this is an attractive time to enter a short position.
While the combination of Bulls Power, Bears Power, and an EMA as part of the Elder-Ray method reveals useful information about the market, you can usually benefit from throwing another indicator or two into the mix. A shrewd choice of indicators will allow you to gain a deeper understanding of what is happening in the market, by considering wider aspects of data.
Naturally, the wider choice of indicators you have at your disposal, the more flexibility you will have in putting combinations together. MetaTrader 4 Supreme Edition is a free plug-in that substantially extends the functionality of MT4. When you download MT4SE, you will be able to pick from a larger selection of indicators than the standard set in MetaTrader 4.
Alexander Elder himself said that markets were too complicated to be analysed with a single indicator, noting that different indicators may yield contradictory signals when looking at the same market. This is why he included the idea of filtering first with a trend-following tool and then using oscillators to pick favourable entry points. We used an EMA as our trend-following tool above, but there are many others you could consider as alternatives.
As well as using multiple indicators, you may find it useful to look at more than one time frame. Try looking one time frame higher first, in order to get a feel for the bigger picture. For example, if you are looking to trade using an hourly chart, first take a look at a four-hour chart and analyse the trend there.
As with any technique, the more you practise, the more adept you will become. Before you start trading with real money, therefore, it's sensible to first try out your trading ideas in a risk-free environment. An easy way to do this is to open a Demo Trading Account.
Bulls and Bears Power Indicators in Summary
As we have discussed, Bulls Power and Bears Power are useful ways to look at the price and see the strength behind the market. Bulls Power measures the capability of buyers in the market to lift prices above an average consensus of value. Bears Power measures the capability of sellers to drag prices below an average consensus of value. Using them in tandem with a measure of trend allows you to identify favourable entry points.
We hope you've found this a useful discussion of the Bulls and Bears Power indicators. If you're interested in other similar indicators, why not take a look at our articles on the Momentum Indicator or the Accumulation Distribution Indicator.