In our last article on technical indicators, we introduced the rather unknown indicator Bears and Bulls-Power. It is an indicator that is displayed as a histogram. The values are divided into phases on the basis of closing prices and special weighting, so that the histograms show certain trends.
To repeat: According to our own assessment, the interpretation of the indicator works as follows:
- If the Bulls Power histogram is above the zero line, the bulls are currently gaining strength.
- If the Bears Power histogram is below the zero line, the bears are gaining strength.
Here again the chart from the last post:
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Set up a strategy with the Bears and Bulls power indicator
We also found that it makes sense not only to use the above-mentioned rules of interpretation, but also to pay attention to patterns within the histograms, as changes in the courses can be recognized more quickly. We also take advantage of this when building our strategy.
In addition, we want to use technical setups to confirm the changes we have identified with the indicator and to define the time of purchase. We use the following rules:
To buy a call option, the following things have to be fulfilled:
- The Bears Power histogram was recently low and decreased very quickly towards the zero line.
- The Bulls histogram crosses the zero line before the Bears histogram.
- The change to a new trend must be confirmed by a technical setup (outbreak from a trend line or a technical resistance or a technical support).
For the purchase of a put option, the rules apply in reverse, i.e. that is, bulls power becomes lower and bears power crosses the zero line first. In addition, the runtime should also be taken into account. This depends on which chart unit of time you use or how short-term the strategy is.
In this case, you have to say that the indicator is more suitable for medium-term trading depending on the value traded, i.e. at least that The 4 hour chart should be analyzed. This means that the term of the option should be between 12 hours and a few days. We take a look at this using the S&P 500 index:
- First, we identify an existing trend, because we want to bet that a new one will be established, or at least a larger recovery will take place.
- Then we identify the patterns according to the rules in the histograms and in the course.
As can be seen, there doesn't have to be much for this strategy. It could be further optimized by buying the call option only after the breakthrough of the technical resistance was triggered, i.e. the breakout point was retested, which is the case with the present analysis. Such retests ensure that the price is cheap. Traders have to buy in the opposite direction. This requires rethinking and some courage, but it pays off in many cases.
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Conclusion - good indicator with few weaknesses
Let's summarize briefly: the Bears and Bulls histograms are good indicators. They are easy to use and, when used correctly - as shown above - can deliver good signals. The strengths of the indicator are its simplicity on the one hand and the reliability of the signals on the other.
Now you know what the Bears and Bulls histograms are and how they can be used for trading.
A weakness of the indicator is that the reliability decreases with the short-term nature of the analysis. This starts with a time unit of one hour. From here, the histograms fluctuate very strongly and also indicate trend changes in sideways phases. In very short-term analyzes, it might make sense to display and smooth the histograms as a difference line, so that a newly calculated indicator results from this. Some analysis programs offer this, some do not.
Overall, however, the indicator is well suited for medium-term traders. The duration of the option should not be less than 12 hours. Less would be possible if the optimization could be implemented using the above-mentioned retest, but this depends on the respective situation. With the broker IQ Option, traders can trade indices using classic options with terms between five minutes and 150 days.
Here you will find information on the DeMarker indicator and indicators as trading systems.