The Bears Power indicator is a momentum oscillator used to help identify potential reversals and oversold conditions in forex trading. This oscillator measures the strength of a downtrend by comparing a currency’s current close to its recent high over a specified lookback period.

Bears Power can be a valuable tool for forex traders looking to capitalize on strong downtrend moves and potential reversal points. In this comprehensive guide, we’ll cover everything you need to know about using the Bears Power indicator effectively in your trading.

What is the Bears Power Indicator?

The Bears Power indicator was developed by Alexander Elder and aims to measure the strength of the bears or sellers in the market. It is an oscillator that fluctuates between zero and -100. The closer the reading is to -100, the stronger the downtrend.

bears power chart

At its core, Bears Power compares the current close to the highest high over a set lookback period. The difference between the two prices is then normalized on a scale from 0 to -100. This normalized value is plotted as the Bears Power oscillator.

Formula:

BearsPower = High(lookback period) – Close

Where:

High = Highest high over lookback period Close = Current closing price

The standard setting is a 13-period lookback. However, this can be adjusted based on the desired sensitivity and trading timeframe. Shorter lookback periods will produce a more reactive oscillator while longer lookback periods will produce a smoother oscillator.

How to Use Bears Power Indicator

bears power settings

The Bears Power indicator is best suited for trading the main downtrend and identifying potential exhaustion moves. Here are some key ways to utilize the Bears Power oscillator:

Identify Strong Down Moves

Look for Bears Power readings below -50 or -75 to indicate a strong downtrend is in play. The further Bears Power is below zero, the stronger the bears are. Focus on trading in the direction of the downtrend when Bears Power is strongly negative.

Spot Potential Reversals

Watch for bullish divergence on Bears Power, which occurs when price makes a new swing low but the oscillator fails to reach new lows. This positive divergence warns of waning downside momentum and a potential trend reversal.

Catch Oversold Opportunities

Extremely low Bears Power levels below -90 can signal oversold conditions setting up a currency for a corrective bounce higher. Consider counter-trend trades when the oscillator reaches unsustainably low levels.

Gauge Trend Strength

Monitor the swings in Bears Power to help assess the vitality of a downtrend. Expanding negative momentum and new lows in the oscillator signal robust selling pressure. However, contracting swings show fading bearish momentum.

Bears Power vs. Relative Strength Index (RSI)

The Bears Power indicator is often compared to the popular Relative Strength Index (RSI) oscillator. Both are bound between 0 and -100 and utilize lookback periods to measure price momentum. However, there are some key differences:

  • Construction – Bears Power only looks at high price over the lookback period. RSI compares the average gains and losses.
  • Overbought/oversold – RSI has set overbought and oversold levels at 70 and 30. Bears Power does not have fixed oversold levels.
  • Objective – Bears Power aims to measure bearish/selling momentum specifically. RSI measures momentum more broadly, both on ups and downs.
  • Divergences – Bullish RSI divergences are key. But Bears Power divergences are less reliable due to its one-sided measurement.

So while both oscillators help identify momentum, Bears Power is more specialized for trading downtrends and reversals off extreme lows. RSI has a more balanced approach applicable in both uptrends and downtrends.

Trading Examples

Let’s walk through some real trading examples to demonstrate effective use of the Bears Power indicator:

Strong Down Move

In mid-July, AUD/USD began a steep slide lower as Bears Power moved from -20 down towards -50. This showed strong and increasing downside momentum in play.

Traders could look to enter short positions with confidence as Bears Power stretched further below zero with the aim of riding the downtrend. Stop losses can be placed above recent swing highs.

Oversold Bounce

In early September, Bears Power on the EUR/CAD daily chart reached an extremely oversold level around -90. This signaled unsustainable selling pressure and divergence versus price.

Traders could look to take counter-trend long positions on a pullback around the magenta line. The oscillator warned of impending exhaustion of downside momentum and preceded a correction higher in price.

Bullish Divergence

On this EUR/JPY daily chart from March, note how Bears Power formed clear bullish divergence with price. As the exchange rate made new lows, the oscillator failed to reach new extremes.

This bullish divergence suggested waning downside momentum and the chance of an impending upside reversal. Traders could look to buy around the divergence low ahead of the ensuing up-move.

Bears Power Trading Tips

When utilizing the Bears Power indicator in your forex trading, keep these tips in mind:

  • Use on sufficiently liquid, trending pairs like the majors and commodity currencies
  • Optimize the length of the lookback period for the timeframe traded
  • Combine with price action analysis like support/resistance and candlestick patterns
  • Watch for divergence with price, especially at extremes
  • Use Bears Power to confirm trade signals from other indicators
  • Be aware Bears Power lags price, so don’t expect leading signals
  • Consider oversold readings under -80/-90 as alerts, not automatic buy signals

Bears Power Indicator Settings

The Bears Power indicator has just a few key settings to adjust:

Length – The lookback period used in the calculation, typically 13 periods. Can adjust based on chart timeframe.

Applied Price – The price input, usually set to Close by default. Can change to High, Low or Median price.

Style – The plot style of the oscillator, such as line, histogram or cross.

Colors – The colors used for the positive and negative values. Often blue/red or black/red.

Levels – Some opt to add horizontal levels at -20, -50, -80 to visually represent strength.

The standard length of 13 and close price tend to work well for most traders. Don’t overcomplicate the analysis by adding too many additional settings or price options.

Bears Power Strategy Guide

Here are some key strategies to consider when incorporating the Bears Power indicator into your forex trading:

Momentum Fade

Aim to trade reversals when Bears Power reaches extreme oversold levels below -80 or -90. This signals excess pessimism and a chance to buy a pullback in anticipation of an upside correction.

Bearish Swing Trades

Look for sustained Bears Power readings below -50 during a downtrend. Use pullbacks to open short positions with the trend, taking profits as momentum expands lower.

Divergence Setup

Watch for bullish divergence with price to anticipate trend reversals. When a new price low fails to confirm with a new Bears Power low, expect upside.

Oscillator Combo

Combine Bears Power with a secondary oscillator like the Stochastics. Aligning oversold signals gives more robust entry signals and confirms exhausted sellers.

Breakout Fade

Monitor for failed breakdowns on big bearish bars when Bears Power is overextended. This flags potential long entries back above key support levels if the momentum doesn’t follow through.

Bears Power vs. Other Oscillators

The Bears Power indicator is one of many technical trading oscillators forex traders can look to incorporate in their analysis. How does it compare to some other popular momentum indicators?

Relative Strength Index (RSI) – As covered earlier, RSI is the most similar comparison. But RSI more broadly measures trend momentum rather than sellers specifically.

Stochastics – Stochastics are better suited for identifying overbought/oversold turning points in ranging markets. Bears Power focuses just on the oversold side.

MACD – The Moving Average Convergence Divergence oscillator doesn’t directly measure overextended momentum like Bears Power. But MACD divergences can complement Bears Power signals.

Williams %R – Like Bears Power, %R identifies oversold levels and aims to trade reversals. But it measures downside momentum from the close relative to the high/low range rather than using a period average high.

So while these momentum oscillators have some overlap with Bears Power, they all bring unique strengths to analyze markets. Combining Bears Power with other indicators like MACD or Stochastics can create an effective trading system.

Common Bears Power Trading Mistakes

While the Bears Power indicator can be advantageous for forex traders, avoid these common mistakes:

Acting on a Single Signal – Never take a trade based on Bears Power alone. Use with supporting price action or confirmation from other indicators.

Over-Optimizing Settings – Don’t obsess over finding the perfect parameters. Stick with standard settings (13 period close) unless you have a justified reason to optimize.

Ignoring Context – Make sure Bears Power aligns with the overall trend and market conditions. Don’t take buy signals in a strong bear trend.

Late Reversal Entries – Since Bears Power lags price, entries on reversals often come after much of the move has occurred. Look to anticipate signals with divergence.

No Stop Loss – Always use a stop when trading Bears Power signals. Oversold can become more oversold, so limit risk in case the momentum continues.

Forgetting Risk/Reward – Having an oscillator signal doesn’t guarantee a profitable trade. Maintain a suitable risk/reward ratio for Bears Power-based trades.

Avoid these mistakes, and the Bears Power indicator can become a valuable addition in analyzing and trading forex price action.

Conclusion

The Bears Power oscillator is a straightforward yet powerful momentum indicator specifically tailored to measuring the strength of downtrends and oversold levels. By quantifying negative momentum, Bears Power helps traders identify high-probability short entries, gauge trend strength, spot climactic selling, and trade counter-trend reversals.

Incorporate this indicator into your trading arsenal using the strategies outlined. But be sure to combine Bears Power with confluence from other technical indicators and price action context. Used properly, Bears Power can significantly improve the timing and profitability of trades focused on bearish market conditions and oversold extremes.

For active forex traders adept at technical analysis, the Bears Power indicator delivers valuable insights into shifting momentum. Add it to your charting toolbox to make more informed trading decisions.