Being able to visualise the strength of the bulls and the bears can be very useful, especially when attempting to assess if a level will hold or if a trending market is slowing down. I wrote an MT4 indicator that helps visualise this information, it’s use will be the topic of this post.
When price moves higher and lower, in the absence of news, it will rarely move straight up or down. Instead, price will move in the form of ascending or descending sine waves. Price moves this way is because in order for price to e.g. move higher, it must first move lower and fill the buy orders required to push price higher. This filling of orders, both buy and sell orders, causes price to move up and down as we are used to seeing on our charts. When price moves higher, historically respected highs (e.g. in the form of an exponential moving average) must be broken in order to do so. Comparing the current bar’s high to historical levels can certainly tell us who is in charge, the bulls or the bears, and placing these side-by-side can really give us a visual indication of the direction of order-flows.
Calculating the distance from the current bar’s high to the EMA used to represent historical prices, shows the capacity of bulls to move price above the average consensus of price. This calculation expresses the strength of the bulls when greater and rising, and the weakness of the bulls when the calculation shows falling values and complete loss of strength when negative. The strength of the bears, in contrast to the bulls, is expressed when the distance between the current bar’s low and the EMA increases. Typically, the strength of the bears will be displayed as a negative, falling reading but can also be negative or positive and increasing when the bulls are in control. Likewise, the strength of the bulls is expressed via a positive reading which is increasing but can also become negative and falling when the bears are in control.
Combine the above with a similar comparison of the current bar’s range and historical range data and you can watch the story unravel before you. The MT4 indicator written to perform such calculations can be used in multiple ways but is of most use in relation to momentum setups such as the divergence of price and momentum at historically respected and technical study levels.
The following explains the different components of the MT4 indicator:
- The green line shows the strength of the bulls. When positive, a bullish market
- The red line shows the strength of the bears. When negative, a bearish market
- The grey histogram shows the development in range readings. Higher readings denote that price is moving higher/lower than historical range readings
Consider the following screen-shot:
As can be seen above, the indicator works well when being used to identifying bullish and bearish price and momentum divergence.
It is important to note that when both lines are either positive (bullish) or negative (bearish) that there is tremendous momentum involved in the move. If the green line, which indicates the strength of the bulls, is giving a negative reading and moving lower, then there is only very limited buying pressure. Likewise, if the red line, which signifies the strength of the bears in giving a positive reading, then there is very few sell orders being filled.
The Pipnotic Momentum Meter MT4 indicator can be downloaded for free here.