It is very important to be able to estimate the Bears Power balance since changes in this balance initially signalize possible trend reversal. This task can be solved using the Bears Power oscillator developed by Alexander Elder and described in his book titled Trading for a Living. Elder based on the following premises when deducing this oscillator:
- moving average is a price agreement between sellers and buyers for a certain period of time,
- the lowest price displays the maximum sellers’ power within the day.
On these premises, Elder developed Bears Power as the difference between the lowest price and 13-period exponential moving average (LOW – EMA).
This indicator is better to use together with a trend indicator (most frequently Moving Average):
- if the trend indicator is up-directed and the Bears Power index is below zero but growing, it is a signal to buy;
- it is desirable that, in this case, the divergence of bases were being formed in the indicator chart.
The Formula for BP is:
BEARS = LOW – EMA
BEARS – Bears Power;
LOW – the lowest price of the current bar;
EMA – exponential moving average.
The first stage of this indicator calculation is a calculation of the exponential moving average (as a rule, it is recommended to use the 13-period EMA).
In the down-trend, LOW is lower than EMA, so the Bears Power is below zero, and the histogram is located below zero lines. If LOW rises above EMA when prices grow, the Bears Power becomes above zero and its histogram rises above zero lines.