Balance of power indicator

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Balance of Power

Tutorial about Balance of Power and how it could be used to measure the strength of a price trend and how it could be used in technical analysis and on stock charts to generate trading signals. The Balance of Power indictor could be used to generate signals on our stocks charts. This indicator may help when it is used in junktion with volume based indicators that help to track money flow and volume surges.

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Balance of Power (BOP)

Description

The Balance of Power (BOP), indicator was developed by Igor Livshin and it was introduced in the August 2001 issue of Stocks and Commodities Magazine. The BOP indicates measures a price trend by evaluating the strength of buyers vs. sellers by assessing how strongly price is pushed to extreme high and low levels. By itself, the Balance of Power is quite choppy indicator and Simple Moving Average is applied to smooth it.

Technical Analysis, Signals and Trading Systems

The Balance of Power is a simple indicator and it is used in technical analysis to compare the strength of buyers vs. sellers. The BOP oscillates around zero center line in the range from -1 to +1. Positive BOP reading is an indication of buyers’ dominance and negative BOP reading is a sign of the stronger selling pressure. When BOP is equal zero it indicates that buyers and sellers are equally strong.

On the charts below you ay see the comparison of the BOP readings to candle bars.

Chart #1: Balance of Power values compared to candle bars:

The same as with most oscillators in technical analysis, Balance of Power could be used to generate trading signals on the crossovers with its center line. A simple trading system based on the Balance of Power indicator would suggest:

  • buy when BOP crosses above zero line – becomes positive;
  • sell when BOP crosses below zero line – becomes negative.

On the SPY stock chart below you may see the example of such simple trading system. From the same chart below you may see the main problem of the BOP indicator – its choppones. The Balance of Power is quite choppy indicaor and when you analyze it in real time you have to take it into account.

Balance of Power Formula and Calculations

Balance of Power is calculated by the following formula:

BOP = SMA of [ (Close – Open) / (High – Low) ]

By V. K. for MarketVolume.com

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Balance Of Power Indicator Formula, Setup And Usage

Balance Of Power indicator or BOP measures the power that the buyers and sellers have. It’s a very volatile indicator. It goes up and down very often. It also determines market strength by assessing the strength of total buyers against that of total sellers and their ability to drive the price to extreme ends.

More on the Balance of Power Indicator

The BOP is an indicator, and typically not an oscillator. BOP moves along a zero line. When the balance of power indicator is above zero lines, it indicates buyers are in control. Similarly, when BOP goes below the zero lines, it shows sellers are strong. There are divergences also. Divergences are of two types, regular and hidden.

Balance Of Power indicator Formula

The formula or calculation of the BOP is (CLOSE – OPEN) / (HIGH – LOW)

How to set up Balance of Power Indicator on the charts?

Setting up the BOP on Zerodha Kite

The BOP indicator is present in the Studies section in Zerodha Kite. Open up your favorite stock chart and attach the indicator by accessing the Studies section. Here you can choose the parameters you want to use for the BOP indicator.

By default, BOP considers a 14-day period and a simple moving average. But the default parameters can be modified as per own demand. You can increase or decrease the period. Instead of the simple moving average, you can choose other types of moving averages. There are Exponential, Time-Series, Triangular, Variable, VIDYA, Weighted, Welles Wilder, Hull, Double Exponential and Triple Exponential types of MA also. Here the indicator oscillates between +1 and -1.

Setting up the BOP on Upstox Pro

The Balance of Power indicator is also available on the Upstox Pro platform. Similar kinds of setting like Zerodha here too can be applied on the charts.

How to trade using the Balance of Power Indicator?

  • The BOP indicator works almost in all the time frames.
  • As can be seen in the picture below, a buy position is created when the BOP indicator goes up from below the zero line indicating price reversal.
  • The buy position is closed when the BOP indicator tops above zero line and starts coming down accompanied by a downward movement of price.

The Zero Line Reject

We can see the zero line can act as a good support or a resistance. In case of a strong trend in the market, the Balance of Power Indicator founds great support or resistance near the zero line. It tests the zero line and could not sustain there and either falls back (sell) or rises up (buy). This can trigger a pullback entry with low risk and high return. This strategy is similar to the ZLR in the Woodie CCI indicator. Watch the image below for a perfect short sell setup.

Here I have used a Hull Moving Average (HMA) for confirming the trend. When the price is moving below the HMA the trend is down. Now if the BOP tests the zero line but could not stay there and falls down it is a low-risk entry in the short sell trade. A similar strategy can be used for a buy setup too. Instead of the HMA, you can also use SuperTrend for confirming the trend.

Trading the Balance of Power Indicator Divergence

The BOP can also spot divergence nicely on the charts. Whenever the price move up and makes a new high but the BOP can’t make new highs it is a negative divergence. Similarly, when the price moves down and makes new lows but the BOP is unable to make new lows it is a positive divergence. The divergence can indicate a probable change of trend. You can enter a trade in the opposite direction using any trend line break.

Trading as an overbought oversold indicator

The Balance of Power indicator can sometimes be traded as an overbought oversold indicator too. For this, we have checked some historical levels. We have noted that the BOP dipping close to -0.5 triggers major rallies in the Nifty index.

As an example on 18th November 2020, the BOP dipped close to -0.5 in the daily charts. This triggered a major rally that lasted for the next 22 months before any significant correction. Once again the BOP dipped close to -0.5 at the end of day charts on 5th October 2020. That again formed a bottom and market rallied a lot till the last high. Watch the image below.

Conclusion

The Balance of Power Indicator oscillates between +1 and -1 in the Zerodha Kite platform. Traders can use this indicator for a buy signal and sell signal as per the zero line cross. Some low-risk pullback entries can also be taken using the zero line reject strategy. Another kind of trading this indicator is to follow its divergences. Sometimes, this indicator can also be traded as an overbought oversold indicator specially in the Indian indices.

Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely. View all posts by Indrajit Mukherjee

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Balance of Power

Balance of Power

This lesson will cover the following

  • Explanation and calculation
  • How to interpret this indicator
  • Trading signals, generated by the indicator

This indicator was first introduced by Igor Livshin in the August 2001 edition of Technical Analysis of Stocks and Commodities magazine. The Balance of Power measures the strength of buyers against sellers in the market by assessing the ability of each side to drive prices to an extreme level. It is calculated as follows:

Balance of Power = (Close price – Open price) / (High price – Low price)

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The resulting value is usually smoothed by a moving average.

The Balance of Power (BoP) can be used in three ways in order to provide trading signals:

First, identifying the direction of the trend. When the indicator tends to be rising, this is evident that the market is in a bull trend. When the indicator tends to be decreasing, this is evident that the market is in a bear trend. In addition, crossovers of the zero line provide trading signals. When the BoP crosses above zero, this is considered as a signal to buy. When the BoP crosses below zero, this is considered as a signal to sell.

Second, searching for divergences between the price and the BoP in order to identify a potential trend reversal or trend continuation setup. There are two types of divergences – regular and hidden. Regular divergences signal trend reversals, while hidden divergences signal trend continuation.

A regular bullish divergence is a situation, when the market forms lower lows, while the BoP forms higher lows.

A regular bearish divergence is a situation, when the market forms higher highs, while the BoP forms lower highs.

A hidden bullish divergence is a situation, when the market forms higher lows, while the BoP forms lower lows.

A hidden bearish divergence is a situation, when the market forms lower highs, while the BoP forms higher highs.

Third, taking advantage of overbought and oversold conditions. These extreme levels provide an early indication that a trend reversal is at hand. Overbought/oversold conditions are present, when the BoP clusters its tops and bottoms. This way it sets up the overbought and oversold levels around those values. There are cases, when the price also tends to remain at these overbought/oversold levels and continue to move in the same direction for a certain period of time. So, in those cases it would be safer, if the trader waits for the BoP to cross over the zero line before placing his/her order.

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