An oscillator that represents the battle between the bulls and the bears in the market.
The Balance of Power (BOP) indicator was described by Igor Livshin in the August 2001 edition of Technical Analysis of Stocks and Commodities magazine. Livshin explains that, “The balance of power (BOP) indicator measures the strength of the bulls vs. bears by assessing the ability of each to push price to an extreme level.” The Balance of Power indicator is calculated by the formula:
BOP = (Close price – Open price) / (High price – Low price)
The resulting Balance of Power value is then typically smoothed by a moving average.
Balance of Power on the USD/JPY Daily Chart in 2010
Source: VT Trader
There are four basic techniques for using the Balance of Power indicator to generate trading signals.
Trend Direction: When the BOP is rising, prices are in an upwards trend. When the BOP is declining, prices are in a downwards trend. BOP / Zero crossovers may also be useful. When the BOP crosses above zero a buy signal is given. Alternatively, when the BOP crosses below zero a sell signal is given.
Divergence: Looking for divergences between the BOP and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There are several types of divergences:
Classic Divergence (aka: Regular Divergence)
* Bullish Divergence = Lower lows in price and higher lows in the BOP
* Bearish Divergence = Higher highs in price and lower highs in the BOP
Hidden Divergence (aka: Reverse, Continuation, Trend Divergence)
* Bullish Divergence = Lower lows in BOP and higher lows in price
* Bearish Divergence = Higher highs in BOP and lower highs in price
Overbought/Oversold Conditions: The BOP can be used to identify potential overbought and oversold conditions in price movements thereby providing an early warning for potential trend reversals. These conditions are generated by observing where the BOP clusters its tops and bottoms and setting its overbought and oversold levels around those values.