Advanced Elder Ray Divergence Strategy #13
The Black Book of Day Trading Strategies
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This article provides a detailed examination of an advanced trading strategy utilizing the Elder Ray Index, specifically focusing on divergence analysis. We will explore the mathematical underpinnings of the indicator, demonstrate its application with historical data, and provide a concrete trading example.
The Elder Ray Index: A Brief Overview
The Elder Ray Index, developed by Dr. Alexander Elder, is a effective tool for gauging the balance of power between bullish and bearish forces in the market. It consists of two components: Bull Power and Bear Power.
Mathematical Formulation
The calculation of the Elder Ray Index components is as follows:
- Bull Power:
Bull Power = Daily High - 13-period EMA - Bear Power:
Bear Power = Daily Low - 13-period EMA
Where the 13-period Exponential Moving Average (EMA) serves as a proxy for the market consensus of value.
Divergence Analysis with Elder Ray
Divergence between the price action and the Elder Ray indicators can signal potential trend reversals. This article will focus on a specific type of divergence.
AAPL Data Example
Let's analyze a segment of historical data for Apple Inc. (AAPL) to illustrate this strategy.
| Date | Close | EMA13 | Bull Power | Bear Power |
|---|---|---|---|---|
| 2025-08-20 | 226.01 | 225.07 | 5.40 | 0.70 |
| 2025-08-21 | 224.90 | 225.05 | 1.47 | -1.27 |
| 2025-08-22 | 227.76 | 225.44 | 3.65 | -0.03 |
Trade Example
- Entry Signal: A bullish divergence is observed when the price makes a new low, but the Bear Power indicator forms a higher low. For instance, on 2025-08-27, we might observe such a pattern.
- Entry Price: A buy order could be placed above the high of the signal day, at approximately $231.00.
- Stop Loss: A stop loss could be placed below the low of the signal day, at approximately $228.16.
- Exit Signal: The position could be closed when the Bull Power indicator shows a bearish divergence, or when a predetermined profit target is reached.
This example provides a framework for applying Elder Ray divergence analysis in a practical trading context. Further research and backtesting are recommended to refine this strategy.