Once again, the Elder-Ray Index is an indicator developed by Alexander Elder. It measures the amount of buying and selling pressure in the market. The components of the Elder Ray Index indicator are “bull power” or “bear power”. These are combined with an exponential moving average, which is a trend-following indicator essential to the calculation. Bull power of this indicator is a simple calculation which derived by subtracting an exponential moving average of closing prices from a high price of any security.
Bull Power is used to measure the potential for the price to increase above the moving average, and Bear Power is used to measure the potential for the price to decrease below the moving average. Long positions are taken when the Bear Power is below zero and there is a bullish divergence while short positions are assumed when the Bull Power is above zero and there is a bearish divergence.
In Elder Ray Index indicator high price of any candle shows the maximum power of buyers and the low price of any candle shows the maximum power of sellers. In Zerodha Kite charts, it uses the EMA of 13-period by default (see the State Bank of India chart image below), in order to present the average consensus of price value. In the chart, Bull Power shows whether buyers are capable of pushing prices above the average consensus of value and Bear Power shows whether sellers are capable of pushing prices below the average consensus of value. In this indicator, Bull Power is the result of subtracting the 13-period EMA from the high price of the day and Bear Power is the result of subtracting the 13-period EMA from the low price of the day.
In Elder Ray Index indicator, Bull Power should remain positive under normal circumstances, and Bear Power should remain negative in normal circumstances. In Bull Power enters into negative territory. This implies that sellers have overcome buyers and control the market and the Bear Power indicator enters into positive territory and this indicator indicates that buyers have overcome sellers and control the market. A trader should not go long at times when the Bear Power indicator is positive and he/she should not go short at times when the Bull Power indicator is negative.
In 13-period EMA’s slope can be used in order to identify the direction of the major trend. Elder Ray Index indicator can generate some most reliable buy signals. In this when there is a bullish divergence between the Bear Power indicator the price Bear Power forms higher lows, while the market forms lower lows. And in this indicator the most reliable sell signals are generated, when there is a bearish divergence between the Bull Power indicator and the price (Bull Power forms lower highs, while the market forms higher highs).