In the forex market, there are two types of trader:
- Bulls – who buy a currency because they believe the market will go up
- Bears – who sell because they think the market will go down
Currency prices go up when bulls predominate, and go down when bears predominate. If you can determine which force is stronger, you can predict currency price changes.
The Bears’ Power indicator shows the strength of the bears. It was developed by Alexander Elder, who described it in his book “Trading for a Living”. If the indicator is below nought, the bears are strong; if it is above nought, they are weak. The indicator is based on two premises:
- The moving average of a price indicates where buyers and sellers agree
- The lowest price in a day is reached when selling pressures are strongest
Therefore, the difference between lowest price in a day and the moving average shows how strong the bears are; the bigger the gap, the more the bears brought down the price.
Using the Bears’ Power indicator
It’s best to use Bears’ Power along with another trend indicator, such as the moving average price. It’s a signal to buy when the following conditions are met:
- The trend indicator is up
- Bears’ Power is negative but rising
The buy signal is stronger if it follows a bullish divergence.
The Bears’ Power (BEARS) indicator is the low price for the day (LOW) minus the 13-day exponential moving average (EMA) price.
BEARS = LOW( price ) – EMA ( price, 13 )
As bears become stronger, the Bears’ Power indicator decreases. It increases as they become weaker.