Elder-Ray Index

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 a market. This indicator comprises of two indicators known as "bull power" and "bear power," which are derived from a 13-period exponential moving average (EMA). These, along with the EMA, assist traders with deciding the trend direction and confine spots to enter and exit trades.

Understanding the Elder-Ray Index

Technical traders will utilize the values of bull and bear power, along with divergence, to settle on trading choices. Long positions are taken when the bear power has a value below zero yet is expanding, and the bull power's most recent pinnacle is higher than it was formerly (rising). A short position is taken when the bull power value is positive yet falling, and the bear power's recent low is lower than it was formerly (falling).

The slant of the EMA can likewise be utilized in the two cases to assist with affirming the direction of the trend. Traders can look for the bull and bear signals and afterward trust that the EMA will begin moving in the anticipated direction before taking a trade, or some of the time the EMA will currently be moving in a specific direction and afterward the bull/bear power indicators will give an affirming trade signal.

Dr. Elder's original methodology generally utilizes a 13-day exponential moving average (EMA) to measure the market's consensus of value. This might be altered in view of personal preference, and Elder himself used 26-day EMAs while examining week by week charts. Bull power measures the ability of buyers to drive prices over the consensus value, while bear power measures the ability of sellers to push prices below the consensus value.

Most charting platforms require three windows to be open on one chart while utilizing the Elder-Ray approach.

1. Window one incorporates a bar or candlestick chart with the 13-period exponential moving average.
2. Window two shows the Elder-Ray Bull Power indicator.
3. Window three shows the Elder-Ray Bear Power indicator.

Elder-Ray Index Calculation

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1. Work out the 13-period EMA for the time span being utilized. If utilizing a daily chart, for instance, compute the EMA in view of the last 13 days.
2. Find the period-high price and deduct the 13-period EMA from it to get the bull power value.
3. Find the period-low price and take away the 13-period EMA from it to get the bear power value.
4. Repeat stages one through three each time a period closes.

Elder-Ray Index Vs. Average Directional Index (ADX)

The average directional index (ADX) is derived from the Positive Direction Index (+DI) and Negative Direction Index (- DI) which measure bullish and bearish movement like the bull and bear power indicators. The fundamental difference is that +DI and - DI are smoothed averages divided by the average true reach (ATR). While this multitude of indicators are measuring up and descending movement, the estimations are very different and consequently will appear to be unique and give different trade signals on a chart.

Limitations of Using the Elder-Ray Index

The Elder-Ray Index might be inclined to whipsaws, as the bull and bear power indicators will frequently waver above and below zero.

Since the Elder-Ray Index utilizes a moving average, it is normally a lagging indicator (albeit Elder himself called it a wavering indicator) as it depends on historical price data. Along these lines, it might respond slowly to price changes. A sell signal, for instance, may happen after the price has proactively dropped fundamentally — which can be problematic on the off chance that you are involving the indicator for buy and sell signals. To assist with fixing this problem, set stop-loss orders at the hour of the trade to assist with controlling risk.

In a perfect world, it's best not to utilize the Elder-Ray Index in segregation. Rather, consolidate it with different forms of analysis, for example, price action trading, different indicators, or chart designs.

Highlights

• Technical traders ought to think about long positions assuming the bull power is rising, bear power is an in negative area and rising (getting more vulnerable), and EMA is slanting vertical.
• Assuming the EMA is slanting lower, the bull power is over zero and falling (debilitating), and the bear power is falling, traders ought to think about short positions or selling.
• It is intended to be a trend-following system, where the indicators are utilized to affirm a trade.
• The Elder-Ray Index, developed by Dr. Alexander Elder, utilizes indicators to measure the amount of buying and selling pressure in a market.