Analyzing Bull and Bear Power in Crypto

The Bull Bear Power indicator is a technical analysis tool that helps traders gauge the balance between bullish and bearish pressure in the market. By analyzing price trends and measuring the strength of buyers and sellers, this indicator can be invaluable in identifying potential trend reversals and entry points, especially in highly volatile markets like cryptocurrency. In this post, we’ll explore how the Bull Bear Power indicator works, discuss how to interpret its signals, and examine its application in backtesting and automated crypto trading with bots.

What is the Bull Bear Power Indicator

The Bull Bear Power indicator was developed by Dr. Alexander Elder as a way to quantify the strength of buying and selling forces in the market. This indicator provides insight into whether bulls (buyers) or bears (sellers) are in control, helping traders determine potential entry and exit points. Bull Bear Power is calculated by measuring the difference between the highest price (bulls) and a moving average, and between the lowest price (bears) and the same moving average. This produces a line that oscillates above and below zero, signaling shifts in buying and selling power.

How Does the Bull Bear Power Indicator Work

The Bull Bear Power indicator is derived from two main components:

• Bull Power: Calculated by subtracting the moving average (usually a 13-period EMA) from the highest price of the period. A positive Bull Power value indicates that buyers are in control.
• Bear Power: Calculated by subtracting the moving average from the lowest price of the period. A negative Bear Power value suggests that sellers are stronger.

When Bull Power is above zero and Bear Power is below zero, bulls are in control. Conversely, when Bear Power is positive and Bull Power is negative, bears are dominant. The crossover of these power lines around the zero line provides insight into potential trend reversals or the continuation of the existing trend.

Using Bull Bear Power in Crypto Trading

Identifying Trend Direction

The Bull Bear Power indicator can help identify the prevailing trend. When Bull Power is consistently above zero, it signals a bullish trend, suggesting traders may consider buying opportunities. On the other hand, when Bear Power remains below zero, it indicates a bearish trend, encouraging traders to consider selling or shorting.

Spotting Reversals with Crossovers

The crossover of Bull Power and Bear Power around the zero line can act as a signal for trend reversals. For instance:

• Bullish Reversal: If Bear Power starts rising from negative territory and crosses above the zero line, it may indicate a shift from bearish to bullish momentum.
• Bearish Reversal: If Bull Power drops and crosses below the zero line, it may signal a shift from bullish to bearish sentiment.

These crossovers provide valuable insights into market sentiment, allowing traders to anticipate shifts in buying and selling pressure.

Combining with Other Indicators

While Bull Bear Power is effective on its own, pairing it with additional indicators can enhance accuracy:

• Moving Averages: Using a longer-term moving average alongside Bull Bear Power can help confirm the trend, ensuring traders don’t enter trades against the prevailing trend.
• RSI (Relative Strength Index): Adding RSI can help validate whether the market is overbought or oversold, making Bull Bear Power signals more reliable.
• MACD (Moving Average Convergence Divergence): MACD provides momentum confirmation, helping to strengthen Bull Bear Power signals when MACD aligns with bullish or bearish momentum.
• Bollinger Bands: Combining Bollinger Bands with Bull Bear Power helps identify potential breakouts and reversals. For instance, Bull Bear Power showing bullish strength while price touches the lower Bollinger Band can signal a strong buying opportunity.

Backtesting Bull Bear Power

In this backtest, conducted over the period from January to September 2024, we applied a simple strategy on BTC/USDT using the Bull Bear Power indicator to identify potential buying opportunities and a trailing stop loss for exits. 

Strategy Details:

• Buy Condition: Enter a long position when the Bull Bear Power value on the 1-hour timeframe crosses above 0, signaling that bullish momentum is gaining strength.
• Sell Condition: Use a trailing stop loss set at -1% to lock in profits as the price moves favorably.

The results of this strategy reveal a significant profit, with a total profit percentage of 70.86%. Here’s a breakdown of the key metrics:

• Win Rate: The strategy achieved a win rate of 44.81%, with 151 winning trades out of 337 total positions. While the win rate is under 50%, the overall profitability suggests that the strategy effectively captured strong price movements, with the trailing stop loss securing gains in favorable trends.
• Total Positions: A total of 337 positions were opened over the period, averaging about 1.23 positions per day. This moderate trading frequency indicates that the strategy was selective, entering trades primarily when bullish momentum was confirmed by the Bull Bear Power indicator.
• Profit and Final Balance: Starting from an initial balance of 10,000 USDT, the strategy’s total profit amounted to 7,085.59 USDT, bringing the final balance to 17,085.59 USDT. This reflects a strong performance, as the indicator captured sustained bullish moves in the market.
• Maximum Drawdown: The maximum drawdown was 6.97%, indicating relatively low downside risk during the test. This low drawdown reflects the effectiveness of the trailing stop loss in minimizing losses and preserving gains during unfavorable price reversals.
• Average Position Duration: The average position duration was approximately 6 hours and 41 minutes, indicating that this strategy captured both short-term fluctuations and some sustained trends, allowing trades to remain open for a reasonable time.

This demonstrates that using the Bull Bear Power indicator as a confirmation of bullish strength can be an effective strategy, especially when paired with a trailing stop loss. The Bull Bear Power indicator’s cross above zero helped to filter trades for periods when bullish momentum was more likely, reducing the number of premature or false entries.

The trailing stop loss of -1% played a crucial role in securing profits by closing positions as soon as the price showed signs of reversing. This allowed the strategy to maintain a healthy profit even with a moderate win rate, as each winning trade was able to capture a significant portion of the upward trend.

To enhance our Bull Bear Power strategy, we added a new condition: the Bull Bear Power value must be above 0 on the 30-minute timeframe. This differs from our existing 1-hour crossover condition, which requires that the Bull Bear Power crosses above 0 as a buy signal.

Here’s the reasoning behind this adjustment:

The crossover condition on the 1-hour timeframe signals a fresh shift in momentum, indicating that bulls are starting to take control over the bears. However, by adding the requirement that Bull Bear Power is already above 0 on the 30-minute timeframe, we’re ensuring that there is already an established bullish environment on a shorter timeframe. This helps confirm that buyers are in control and reduces the chance of entering a position in a weak or inconsistent trend.

By requiring the 30-minute Bull Bear Power to be above 0, we add a layer of confirmation that helps validate the crossover signal on the 1-hour timeframe. This additional filter means that we only take positions when bullish strength has already been sustained for some time, providing us with a higher-confidence entry. It helps avoid trades in cases where the 1-hour crossover might be a short-lived or false signal, especially during choppy or sideways markets.

With this additional condition, here’s how the strategy’s performance changed:

• Total Profit Increase: Profit rose to 80.91% (from 70.86%), as the additional confirmation helped capture stronger trends and avoid weaker trades.

• Improved Win Rate: Win rate increased to 46.29% (from 44.81%) due to more selective entries aligned with sustained bullish momentum.
• Reduced Maximum Drawdown: Drawdown decreased to 4.52% (from 6.97%), as trades in weaker conditions were filtered out, reducing potential losses.
• Higher Absolute Profit: Absolute profit reached 8,090.81 USDT, an improvement of over 1,000 USDT, driven by better entry quality.
• Shorter Position Duration: Average position duration decreased to 6 hours and 31 minutes, as profitable trades reached targets more quickly.
• Improved Win to Loss Ratio: Five additional winning trades were achieved within the same number of total trades, enhancing consistency.

Advantages and Limitations

Advantages:

• Clear Buy and Sell Signals: Bull Bear Power provides straightforward signals by highlighting the shifts in market control between buyers and sellers.
• Adaptable to Different Timeframes: The indicator can be used effectively across short and long timeframes, making it versatile for various trading styles.
• Works Well in Trending Markets: Bull Bear Power is particularly effective in trending markets, where it can capture shifts in momentum with fewer false signals.

Limitations:

• Whipsaws in Sideways Markets: In range-bound markets, the Bull Bear Power indicator may produce false signals due to frequent crossovers around the zero line. Using trend indicators as a filter can help reduce these false entries.
• Lagging Nature: Since it’s based on moving averages, Bull Bear Power may lag behind price action, causing delayed entries or exits in rapidly changing markets. Combining it with leading indicators like RSI can improve timing.

Practical Tips for Using Bull Bear Power

1. Adjust Timeframes Based on Volatility: For highly volatile assets, using a longer timeframe (like 4-hour or daily) may reduce noise and produce more reliable signals.
2. Combine with Trend Confirmation: To avoid false entries in choppy markets, consider adding a moving average filter or checking for alignment with other trend indicators.
3. Set Clear Exit Rules: To protect gains, use a trailing stop loss or define exit points, such as a crossover of Bear Power above zero after a long position.