In the last trading training article we teach you 8 tips to improve our market entries. It seems incredible that something as easy as making an entry can cause us these headaches. Perhaps it would be much easier if we had some indicator that would measure the struggle between buyers and sellers, just as the ADX and DIs. And this is precisely what we are going to learn in today's trading training; the Elder Ray indicator.
What is the Elder Ray indicator?路♂️
Let's start this trading training by first talking about what this indicator is. The Elder Ray indicator was developed in 1989 by Dr. Alexander Elder. As it was the first indicator he created, she attributed his last name along with the word rays. Rays refer to an X-ray machine, as this indicator is designed to see through the market. This indicator can be applied to any asset class and helps traders gauge the strength of competing buyers and sellers by searching the depths of markets for data that may not be immediately determinable by superficially looking at prices. Just as he states in his bookLive from trading'; “We should not try to predict, we should read the market at this precise moment.” We have to see at all times what force dominates the market and take advantage of it.
How is the Elder Ray indicator calculated?
To create the Elder Ray indicator, you first take each day's high and low price of the asset, along with an exponential moving average (EMA) calculated with the close. By default, Elder decided to choose all 13 periods for the calculation. Next, when we have these parameters, both the bullish power (maximum price minus EMA value) and the bearish power (minimum price minus EMA value) are calculated with the previous parameters. Let's give an example of the calculation of the Elder Ray indicator with the data mentioned in the ETH/USDT chart from November 10 to 19:
Ethereum November 10-19 data to calculate the Elder Ray. Own elaboration.
If we take the parameters from the table and create a bar graph with the power values, we can see how the Elder Ray indicator is formed, where in this case we see that the bearish power predominates. We have already learned how to calculate the Elder Ray, let's follow this trading training to see how to interpret it.
Appearance of the Elder Ray indicator with the data extracted from the table. Own elaboration.
How can we interpret the Elder Ray indicator?
In order to interpret the Elder Ray indicator we must be attentive to the signals that the indicator sends us. We can understand 4 situations that can give us valuable signals to take advantage of in our operations:
Long entry.
The signals to enter long are given at the opposite moment, that is, when we go from only red to only green and there is an upward crossing of the 13-day exponential moving average. Clearly it may seem complicated to interpret these signals, so it is advisable to support the analysis with other technical indicators.
Buy signal on the Elder Ray indicator. Source: Tradingview.
Bullish divergence.
We can see a bullish divergence when we see that the price forms a series of decreasing lows and a series of increasing highs on the indicator. We recommend identifying the support of the divergence to facilitate the setting of parameters in the operation.
Bullish divergence between price and indicator. Source: Tradingview.
Short entry.
The signals to enter short are given when the indicator turns from green to red and crosses the downward 13-period exponential moving average. That is, when the indicator goes from only green to only red and also the price crosses downwards the 13-period exponential moving average. In the chart below, the indicator is bicolor most of the time. Therefore, the goal is to find the point where it goes from a single green bar to a single red bar.
Sell signal on the Elder Ray indicator. Source: Tradingview.
Bearish divergence.
We can see a bearish divergence when we see that the price forms a series of increasing highs and a series of increasing lows on the indicator. We recommend identifying the resistance of the divergence to facilitate the setting of parameters in the operation.
Bearish divergence between price and indicator. Source: Tradingview.
Conclusions from this trading training.
After finishing this trading training on the Elder Ray indicator, we have seen the benefits it offers us for our operations. As an incentive, we have learned how the indicator is made using the parameters mentioned in the first paragraph, how we can interpret the development of bullish and bearish power. At the same time, we have also learned how we can detect signals to detect moments where we can analyze a possible short or long. Or when a divergence is forming between price and indicator, how to position ourselves in these situations. Surely this indicator has reminded you of the ADX and DI indicators, since it also measures the strength of the bullish and bearish part of an asset. Although in the case of the Elder Ray, it uses a 13-period moving average based on the close, instead of the ADX which is based on an expansion moving average.