The Elder Ray Index is a technical analysis indicator developed by Dr. Alexander Elder that measures the power of bulls and bears in the market. By separating buying and selling pressure into two distinct components, traders can better understand the balance of power and identify high-probability trading opportunities.
What is the Elder Ray Index?
The Elder Ray Index consists of two oscillators that work together: Bull Power and Bear Power. These indicators measure how far buyers can push prices above the consensus value (exponential moving average) and how far sellers can push prices below it.
Key concept: Dr. Elder compares the market to a battle between bulls and bears. The EMA represents the consensus of value, while the high and low prices show the maximum power of each side during the trading session.
Elder Ray Calculation
The Elder Ray Index uses a 13-period exponential moving average (EMA) as the baseline:
Bull Power Formula
- Bull Power = High - 13-period EMA
Bull Power measures how far the bulls can push prices above the consensus value during the day.
Bear Power Formula
- Bear Power = Low - 13-period EMA
Bear Power measures how far the bears can push prices below the consensus value during the day.
Calculation Example
Stock XYZ trading day:
High: $52, Low: $48, 13-period EMA: $50
Bull Power = $52 - $50 = +$2
Bear Power = $48 - $50 = -$2
In this balanced day, bulls pushed price $2 above consensus while bears pushed it $2 below.
Interpreting Bull Power
Bull Power Values
- Positive Bull Power: Normal condition - highs are above the EMA
- Rising Bull Power: Bulls are gaining strength
- Falling Bull Power: Bulls are weakening
- Negative Bull Power: Extremely bearish - even highs are below EMA
Interpreting Bear Power
Bear Power Values
- Negative Bear Power: Normal condition - lows are below the EMA
- Rising Bear Power (toward zero): Bears are weakening
- Falling Bear Power (more negative): Bears are gaining strength
- Positive Bear Power: Extremely bullish - even lows are above EMA
Elder Ray Trading Strategies
1. The Classic Elder Ray Strategy
Dr. Elder's original trading approach:
Buy Conditions
- The 13-period EMA is rising (uptrend)
- Bear Power is negative but rising toward zero
- Bull Power is making new highs (optional confirmation)
Sell Conditions
- The 13-period EMA is falling (downtrend)
- Bull Power is positive but falling toward zero
- Bear Power is making new lows (optional confirmation)
Long Entry Example
Stock ABC is in an uptrend with rising 13-EMA at $75.
Price pulls back. Bear Power drops to -$3 (bears getting stronger temporarily).
Bear Power begins rising: -$3 to -$2.5 to -$2 (bears weakening).
Enter long when Bear Power crosses above -$1.50, stop below recent low.
This catches the pullback in an uptrend as bears lose power.
2. Divergence Trading
Watch for divergences between price and Elder Ray components:
- Bullish divergence: Price makes lower low, Bear Power makes higher low
- Bearish divergence: Price makes higher high, Bull Power makes lower high
3. Extreme Readings
Unusual Elder Ray readings signal potential reversals:
- Negative Bull Power: Even daily highs below EMA - extremely oversold
- Positive Bear Power: Even daily lows above EMA - extremely overbought (rare)
Elder Ray with Triple Screen Trading
Dr. Elder designed the Elder Ray to work within his Triple Screen trading system:
Screen 1: Weekly Trend (Tide)
- Identify the major trend using weekly MACD histogram
- Only trade in the direction of the weekly trend
Screen 2: Daily Elder Ray (Wave)
- Use Elder Ray on daily charts for entry timing
- In uptrends, buy when Bear Power is negative but rising
- In downtrends, sell when Bull Power is positive but falling
Screen 3: Intraday Entry (Ripple)
- Use breakout or trailing stop techniques for precise entry
- Fine-tune entries on shorter timeframes
Combining Elder Ray with Other Indicators
Elder Ray + Moving Average
- Use the 13-EMA slope to define trend direction
- Only take Elder Ray signals in the trend direction
Elder Ray + RSI
- RSI oversold + Bear Power rising = strong buy signal
- RSI overbought + Bull Power falling = strong sell signal
Elder Ray + Support/Resistance
- Bull Power weakening at resistance = potential reversal
- Bear Power weakening at support = potential bounce
Elder Ray Settings
- 13-period EMA: Standard setting recommended by Dr. Elder
- 20-period EMA: Slightly smoother, for swing trading
- 26-period EMA: For longer-term position trading
Common Elder Ray Mistakes
- Trading against the EMA trend direction
- Ignoring the relationship between Bull and Bear Power
- Not waiting for power to shift before entering
- Using Elder Ray in isolation without trend confirmation
Track Your Elder Ray Trades
Pro Trader Dashboard helps you analyze which bull and bear power setups work best for your trading.
Summary
The Elder Ray Index is a powerful tool for measuring the balance of power between bulls and bears in the market. By separating buying and selling pressure into distinct components and comparing them to the EMA consensus, traders can identify high-probability entry points during pullbacks in trending markets. Use the Elder Ray Index as part of a complete trading system, always trading in the direction of the major trend and waiting for power to shift in your favor before entering.
Learn more: MACD indicator and moving averages.