What is the Elder-Ray Index
The Elder-Ray Index is a technical indicator developed by Dr. Alexander Elder that measures the amount of buying and selling pressure in the market. This indicator consists of two separate indicators known as "bull power" and "bear power." These figures allow a trader to determine the position of the price relative to a certain exponential moving average (EMA).
Bull Power = Daily High - n-period EMA
Bear Power = Daily Low - n-period EMA
BREAKING DOWN Elder-Ray Index
Technical traders will use the values of the bull and bear power along with divergence to make transaction decisions. Long positions are taken when the bear power has a value below zero but is increasing, and the bull power's latest peak is higher than it was previously. A short position is taken when the bull-power value is positive but falling, and the bear power's recent low is lower than any other previous bottom. The slope of the EMA can also be used in both cases to help confirm the direction of the trend. Because the Index is fundamentally linked to daily highs and lows, it can only be used for timeframes of no less than a day. As a technical strategy, a trader wouldn't use for detecting intra-day patterns or positions.
Dr. Elder's method generally uses a 13-day exponential moving average (EMA) to gauge the market's consensus of value. Bull Power measures the ability of buyers to drive prices higher than the value consensus, while Bear Power highlights the ability of sellers to push prices below the average value consensus.
As a strategy, most traders will utilize three screens (monitors) when using the Elder-Ray approach.
- Screen 1 will include a bar chart with the 13-day exponential moving average
- Screen 2 will be set up to identify the Elder-Ray Bull Power
- A third screen will be set up similar to screen 2, but looking for the Elder-Ray Bull Power signal
Basic trading rules then say to only trade in the direction of a trend, as identified by the 13-day exponential moving average.