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Indicator: ERI indicator with Forumla, Strategy, Advantages and Limitations - Trading Worker
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ERI (Elder Ray Index)

The Elder Ray Index (ERI) is a technical analysis indicator developed by Dr. Alexander Elder that helps traders measure the relative strength of bulls and bears in the market. It consists of two components - Bull Power and Bear Power - which are calculated in relation to a 13-period exponential moving average (EMA).

Formula

13-period EMA = Exponential Moving Average of closing prices
Bull Power = High - EMA
Bear Power = Low - EMA

How ERI Works

The Elder Ray Index measures the strength of bulls and bears by comparing the highest and lowest prices to a 13-period EMA. Bull Power shows how much the bulls could lift prices above the average consensus of value (EMA), while Bear Power shows how far the bears could push prices below it. When both powers are positive, it indicates strong bullish control, and when both are negative, it suggests strong bearish control.

Trading Strategies Using ERI

Strategy Examples

  • Buy when Bear Power is negative but rising
  • Sell when Bull Power is positive but falling
  • Look for divergences between price and Bull/Bear Power
  • Use EMA slope to confirm trend direction
  • Monitor extreme readings for potential reversals

Support and Resistance Strategy

  • Use Bull Power peaks to identify resistance levels
  • Use Bear Power troughs to identify support levels
  • Look for convergence at key price levels
  • Monitor power readings at historical S/R zones
  • Combine with volume for breakout confirmation

Trend Identification

  • Uptrend: Rising EMA with positive Bull Power
  • Downtrend: Falling EMA with negative Bear Power
  • Use power readings to gauge trend strength
  • Watch for trend exhaustion signals
  • Confirm trends across multiple timeframes

Advantages and Limitations

Advantages

  • Clear measurement of buying and selling pressure
  • Helps identify potential trend reversals
  • Effective for both trend and range trading
  • Works well with other indicators

Limitations

  • Can generate false signals in choppy markets
  • Lag due to EMA calculation
  • Requires confirmation from other indicators
  • May not work well in low volatility conditions

Best Practices When Using Elder Ray Index (ERI)

  • Use multiple timeframes to confirm ERI signals
  • Combine Bull and Bear Power readings for complete market analysis
  • Wait for clear divergences before taking counter-trend positions
  • Monitor EMA direction alongside power readings
  • Look for extreme power readings for potential reversals
  • Use ERI in conjunction with other technical indicators
  • Consider overall market conditions when interpreting signals
  • Document which ERI patterns work best for your trading style
  • Adjust ERI parameters based on market volatility
  • Regularly review and optimize your ERI trading strategy