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 Bulls’ Power indicator shows the strength of the bulls. It was developed by Alexander Elder, who described it in his book “Trading for a Living”. If the indicator is above naught, the bulls are strong; if it is below naught, they are weak. The indicator is based on two premises:
- The moving average of a price indicates where buyers and sellers agree
- The highest price in a day is reached when buying pressures are strongest
Therefore, the difference between the highest price in a day and the moving average shows how strong the bulls are; the bigger the gap, the more the bulls pushed up the price.
Using the Bulls’ Power indicator
It’s best to use Bulls’ Power along with another trend indicator, such as the moving average price. It’s a signal to sell when the following conditions are met:
- The trend indicator is down
- Bears’ Power is positive but falling
The sell signal is stronger if it follows a bearish divergence.
The Bulls’ Power (BULL) indicator is the high price for the day (HIGH) minus the 13-day exponential moving average (EMA) price.
BULLS = HIGH( price ) – EMA ( price, 13 )
As bulls become stronger, the Bulls’ Power indicator increases. It decreases as they become weaker.