Elder Ray Index: Measuring Bull and Bear Power
The Logic of the Market Battle: What is the Elder Ray?
Developed by Dr. Alexander Elder in 1989, the Elder Ray indicator is designed to reveal the balance of power between bulls and bears in the market. It was named after the 'X-ray' because it allows traders to see beneath the surface of price action and identify the hidden strength or weakness of the buying and selling pressure.
The Elder Ray uses three components: 1) A 13-period Exponential Moving Average (EMA). 2) Bull Power (Market High minus 13 EMA). 3) Bear Power (Market Low minus 13 EMA). By comparing the extreme of each bar to the average 'Fair Value' of the market, it reveals the structural momentum of each cycle.
The Formula: High/Low vs. The 13 EMA
The 13-period EMA represents the market's consensus of value. Bull Power is the distance from the day's high to that EMA. Bear Power is the distance from the day's low to that EMA.
If Bull Power is positive, it means bulls were strong enough to push price above the average. If Bear Power is negative, it means bears were strong enough to push price below the average. The most critical signals occur when these powers are moving in opposite directions to the price.
Elder Ray Execution Rules
Primary Filter: 13-period Exponential Moving Average (EMA)
Bullish Strategy: EMA sloping up AND Bear Power is rising
Bearish Strategy: EMA sloping down AND Bull Power is falling
Entry: Wait for Bear Power to move from negative to zero
Exit: Close trade if Bull Power starts to decline in an uptrend
Caution: Avoid trading divergence against a flat EMA
Strategy: Bullish and Bearish Divergence
The Bull Power Setup: In a structural uptrend (EMA 13 is sloping up), wait for Bear Power to drop below zero (a pullback). If Bear Power is negative but starts to rise (making a 'Higher Low' divergence), it indicates that the bear's power is exhausting and the uptrend is about to resume. The Bear Power Setup: In a structural downtrend (EMA 13 is sloping down), wait for Bull Power to move above zero (a rally). If Bull Power is positive but starts to fall (making a 'Lower High' divergence), it confirms that the bulls are failing and the downtrend is structural.
Warning: Trading Against the EMA
The 13-period EMA is the most important part of the Elder Ray. Never take a bullish setup if the EMA is sloping down, regardless of what the Bull Power histogram says. Always trade in the direction of the EMA's slope to ensure you are aligning your entries with the 'Fair Value' consensus of the institutional market.