About Bull Power (green histogram)
The Bull and Bear Power indicators identify whether the buyers or sellers in the market have the power, and as such lead to price breakout in the respective directions.
If buyers in the market are trying to raise the price of the currency, and the price at the end of the period is above the EMA (Exponential Moving Average) for the same period, then they are succeeding in raising the price.
Bull Power = Highest Price (13 period) – EMA (13 period)
About Bear Power (red histogram)
If sellers in the market are trying to lower the price of the currency, and the price at the end of the period is below the EMA for the same period, then they are succeeding in lowering the price.
Bear Power = Lowest price (13 period) – EMA (13 period)
Trading the Divergence Reversal
A powerful method to trade the Bull Bear Power, is to observe divergences between prices and the Bull/Bear power indicators. In a downtrend, look for divergence between prices and the bear power, and in uptrends, look for divergence between prices and the bull power.
Referring to the MT4 chart above, note to the left side where the red vertical line is, we identify the divergence with purple arrows. With prices making lower lows, you would expect to see the bear power indicator heading lower in tandem. However, the Bear power was heading upwards with prices heading downwards. This is an indication of a potential bullish reversal. The blue line right at the bottom across the chart is the RSI, which we put in place for added confirmation. Since the RSI was below 30, it signalled an oversold condition. The two indicators confirm each other and we see a beautiful bullish reversal.
Now on to the right of the chart where the green vertical line is, we identify the divergence with brown arrows. With prices making higher highs, you would expect to see the bull power indicator heading higher in tandem. However, the Bull power was heading downwards with prices heading upwards. This is an indication of a potential bearish reversal. Since the RSI was above 70, it signalled an overbought condition. The two indicators confirm each other and we see a bearish reversal.
Article courtesy of StreetPips.com
