Elder’s Bulls vs. Bears

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Elder’s Bulls vs. Bears is one of the strategies described by Dr. A. Elder in his book about the psychology of trading and trading strategies “Psychology, Trading Tactics, Money Management. New York: J. Wiley, 1993.”. This strategy is considered to be trend-reversal.

Strategy

The main idea of the strategy lies in the essence of the Bulls Power and Bears Power indicators which, incidentally was invented and described by Dr. Elder. In short, Bears Power and Bulls Power indicators reflect the mood of Buyers (Bulls) and Sellers (Bears) on the market. Decreasing in Bulls Power (or BuP) indications suggests that Buyers of the market loses their interest for current price levels, Bears Power (or BeP) has the same principle about Sellers.
So, for the strategy Elder uses BuP and BeP to confirm changes in market trends, also he uses one of the trend indicators to determine entry points.  Which trend indicator to use is open for discussion, the majority uses MA, like the simplest obvious option. This strategy uses W. Wilder’s Parabolic SAR in the role of the trend indicator.

Bulls Power

Bulls Powers show a balance of the Bulls powers regarding the recent period. The indicator base is the ratio of the Moving Average and the bar highs. The higher the bar high above the corresponding value of the MA – the stronger Bulls power. In the uptrend, highs of the bars are higher than MA, so the Bulls Power is above zero. If highs fall under the MA when prices are dawning, Bulls Power becomes below zero and its histogram falls under zero line. Indicator has one input (period), this is the period of the MA. Despite the general default period of 13, current strategy goes better with 24 periods.

Bears Power

Correspondingly, Bears Powers illustrate fluctuations in downward momentum. As well as the Bulls Powers the indicator is calculated by the relation between MA and price lows. The lower the price lows below the MA – the stronger the Bulls power.  In the downtrend, low of the bar is lower than MA, so the Bears Power is below zero. If LOW rises above MA when prices grow, the Bears histogram rises above zero. Same as BuP, the indicator has default input 13 but uses 24.

Parabolic SAR

Parabolic SAR consists of the “dots” placed beyond or above the price on the main chart. Often positioning of the PSAR dots is used by traders to generate transaction signals depending on where these dots are regarding the asset’s price. When dots appear below the price, the trend is considered to remain upward tendency. Similarly, a dot placed above the prices illustrates that the bears are in control and that the momentum is likely to remain downward

Setup

This strategy can be employed not only for the intraday trading but also serves well for trading on timeframes higher than H4. Nevertheless, the trader should always consider the macroeconomic events for the long-term investments. H1 (one-hour bars) timeframe is preferred.  Rules:

  • Any trading instrument is suitable
  • To avoid the impact of market noise we recommend to use time frames higher than 30 min;
  • Install Bulls Power Indicator (we recommend following settings Bulls (24));
  • Bears Power Indicator (we recommend following settings Bears (24));
  • Install Parabolic SAR indicator (standard inputs Parabolic SAR (0.02, 0,2));

elder's bulls vs bears strategy

Entry rules

The strategy follows simple rules: Parabolic SAR shows trend direction; Entry points on the Parabolic SAR turns; BuP and BeP confirm trading signals by decreasing in opposite to the trend powers.

For the Buy signal, we will use Bears Power Indicator. To confirm the signal, the indicator must reach its peak and start to fall. Indicator must rise, i.e. current histogram bar should be higher than previous and so on.

Buy signal:

  • Fractals indicator changes position from above price position to below price position; Fractals indicator confirms its indications on the next bar;
    • While Bears Power histogram are below the zero line, it reached the peak and rising.

Sell signal:

  • Fractals indicator changes position from below price position to above price position; Fractals indicator confirms it is position on the next bar;
    • While Bulls Power histogram is above the zero line, it reached the peak and falling

Exit rules

The strategy allows several exit rules. There are three main types exit rules: exit by Stop Loss, exit by Take Profit and Early Exit rules.

Stop Loss

There are several rules to evaluate Stop Loss, which underlay different risk levels. Usually, Stop-Loss set to the support levels and pivot points. These rules are listed for the Buy signal, for the Sell signal rules should be vice versa.

  • Local bottom of the price (in a range of a trading week)
  • Closest lower Pivot Point
  • Minimum of the last bar (Suitable for the high time frames, H4, D1, W1)
  • Minimum of the current day
  • Current Price – k* ATR (Average True Range show average price motion; k between 2 and 5)

Take Profit

Take Profit is the desired level of profit and must correlate with Stop Loss level. One of the most important indexes of the strategy is relation SL/TP. This relation is called risk/reward level of the strategy.  (rules are for the Buy signal):

  • Local peak of the price (in a range of a trading week)
  • Closest upper Pivot Point
  • Maximum of the last bar (Suitable for the high time frames, H4, D1, W1)
  • Current price + k*Standard Deviation (Standard Deviation indicator stands for an average price motion; k between 0.5 and 1)
  • Current price + k*ATR (ATR – average true range, calculated on a different principal than Standard Deviation; k between 0.5 and 2)

Early exit rules

Early exit can be considered if the strategy gives the reverse signal, while the trade is still opened. Also, changes in the PSAR indicator along could be interpreted as an early exit signal.

Examples

Buy Signal

elders bulls vs. bears buy signal

H1 EURUSD chart; Stop-Loss set couple point below Daily Extremum; Take Profit set on the local Peak; This signal gave 90 pips of profit.

Sell Signal

elders bulls vs. bears sell signal

H1 EURUSD chart; Stop-Loss set couple point below local peak; Take Profit set on the local bottom; This signal gave 98 pips of profit.

Pros

Through the work of Dr. Elder, the strategy has deep psychological feedback, and it is easy to interpret; Suites almost all timeframes.

Cons

Strategy gives false signals during stagnating market periods.

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