Elder Ray Indicator Guide: Bull Power and Bear Power Explained

The Elder Ray indicator, developed by Dr. Alexander Elder, is a powerful technical analysis tool that measures the strength of bulls and bears in the market. By separating buying and selling pressure into two distinct components, Bull Power and Bear Power, this indicator gives traders a clearer picture of who is in control of price action. This guide will teach you how to use the Elder Ray effectively in your trading.

What is the Elder Ray Indicator?

The Elder Ray indicator consists of two components that measure the balance of power between buyers and sellers relative to an exponential moving average. The name "Elder Ray" comes from its ability to "see through" price action like an X-ray, revealing the underlying strength of bulls and bears.

How Elder Ray is Calculated

The calculation is straightforward:

• Bull Power: High - 13-period EMA
• Bear Power: Low - 13-period EMA

The 13-period EMA represents the average consensus of value. Bull Power shows how much the bulls pushed above this consensus, while Bear Power shows how much the bears pushed below it.

Interpreting Bull Power

Bull Power tells you about the strength of buyers:

• Positive Bull Power: Bulls pushed the high above the EMA. Normal in uptrends.
• Negative Bull Power: Bulls could not even push the high above the EMA. Very weak buyers, strong downtrend.
• Rising Bull Power: Bulls are getting stronger.
• Falling Bull Power: Bulls are getting weaker.

Interpreting Bear Power

Bear Power tells you about the strength of sellers:

• Negative Bear Power: Bears pushed the low below the EMA. Normal in most conditions.
• Positive Bear Power: Bears could not even push the low below the EMA. Very weak sellers, strong uptrend.
• Rising Bear Power (toward zero): Bears are getting weaker.
• Falling Bear Power (more negative): Bears are getting stronger.

Trading Strategies with Elder Ray

1. Trend Following with Elder Ray

Dr. Elder's recommended approach combines the EMA direction with Bull and Bear Power:

Buy Setup

• 13-period EMA is rising (uptrend)
• Bear Power is negative but rising (bears weakening)
• Bull Power is making higher highs (bulls confirming)
• Enter long when Bear Power crosses above its prior bar

Sell/Short Setup

• 13-period EMA is falling (downtrend)
• Bull Power is positive but falling (bulls weakening)
• Bear Power is making lower lows (bears confirming)
• Enter short when Bull Power crosses below its prior bar

2. Divergence Trading

Look for divergences between price and the Elder Ray components:

• Bullish Divergence: Price makes lower lows while Bear Power makes higher lows. Bears are weakening despite lower prices.
• Bearish Divergence: Price makes higher highs while Bull Power makes lower highs. Bulls are weakening despite higher prices.

3. Extreme Readings

Watch for unusual Bull or Bear Power readings:

• Extremely high Bull Power: Bulls may be exhausted. Watch for reversal.
• Extremely low (negative) Bear Power: Bears may be exhausted. Watch for reversal.
• Compare current readings to historical levels for that particular security.

4. The Triple Screen System

Dr. Elder developed the Triple Screen trading system, which uses Elder Ray as part of a multi-timeframe approach:

• Screen 1 (Weekly): Identify the trend using MACD histogram
• Screen 2 (Daily): Use Elder Ray to find pullbacks in the trend direction
• Screen 3 (Intraday): Fine-tune entries using breakouts

Key Signals to Watch For

Strong Bullish Signals

• EMA rising
• Bear Power negative but rising toward zero
• Bull Power positive and rising
• Bear Power turning from negative to positive (rare and powerful)

Strong Bearish Signals

• EMA falling
• Bull Power positive but falling toward zero
• Bear Power negative and falling
• Bull Power turning from positive to negative (rare and powerful)

Elder Ray Settings

The standard setting uses a 13-period EMA. You can adjust this:

• Shorter period (8-10): More responsive, more signals, more noise
• Standard period (13): Balanced, Dr. Elder's recommendation
• Longer period (21-26): Smoother, fewer signals, captures larger moves

Combining Elder Ray with Other Indicators

Elder Ray works well in combination with:

• MACD: Use for trend identification, then Elder Ray for timing entries
• Stochastic: Confirm overbought/oversold conditions
• Support/Resistance: Look for Elder Ray signals at key price levels
• Volume: Confirm Elder Ray signals with volume analysis

Common Mistakes to Avoid

• Trading against the EMA direction: Elder Ray signals are most reliable when taken in the direction of the EMA slope.
• Ignoring Bear Power in uptrends: The key signal in uptrends is Bear Power rising (bears weakening), not Bull Power.
• Ignoring Bull Power in downtrends: The key signal in downtrends is Bull Power falling (bulls weakening), not Bear Power.
• Using Elder Ray in isolation: Best results come from combining with trend analysis and other tools.

Practical Tips for Elder Ray Trading

• Always check the EMA direction first: It determines which signals to focus on.
• Look for agreement between Bull and Bear Power: The best setups show both components confirming the trend.
• Watch for subtle shifts: Changes in Bull/Bear Power often precede price moves.
• Use multiple timeframes: Confirm signals across different chart periods.
• Keep a trading journal: Track which Elder Ray setups work best for your style.

Summary

The Elder Ray indicator provides valuable insights into the battle between bulls and bears. By measuring how far price pushes above and below the average (EMA), Bull Power and Bear Power reveal the strength of buyers and sellers. When combined with trend analysis and proper risk management, Elder Ray can help you identify high-probability trading opportunities and time your entries more effectively.

Want to explore more momentum indicators? Check out our guide on the Force Index or learn about the Stochastic Oscillator.