The Balance of power (BOP) indicator is a unique price-based indicator that measures the market’s strength by assessing buyer’s and sellers’ ability to drive prices to an extreme level. The indicator was developed by Igor Livshin and was introduced in the issue of Stocks in August 2001 and Commodities Magazine. The Balance of Power (BOP) is choppy, smoothed up by applying the Simple Moving Average.
Features of Balance of Power (BOP)
• Compares buying and selling powers
• Recommends use of 14-period moving average
• When the indicator clusters its bottoms and tops, it is considered the most important properties
• The indicator assists the oversold/overbought price divergences and trends analysis
• A change in BOP act as a warning to a trader to make an informed decision.
Calculation of Balance of Power (BOP)
Despite the indicator rapidly oscillating above and below Zero Line, it is not an oscillator, and hence it does not indicate the performance of the bullish or bearish swings. The indicator has its own logic and is calculated using the following formula: (Try out indicators on Tradingview.com)
Balance of Power (BOP) = (Close price – Open price) / (High price – Low price)
How Balance of Power indicator work
According to Livshin, a 14 period SMA is recommended, but the number of periods can be varied to fit the trader’s requirement. The indicator oscillates between -1 to +1. A positive value indicates a Security closing above its open value; The more positive the value is, the more positive price is extreme.
When the value is maximum +1 is a clear indication that the market opened at low and closed at a very high value every period included in the moving average.
Balance of Power indicator for traders
The BOP gives a trader an insight into the underlying activity in the trading market. Specifically, the BOP shows the direction of systematic buying and whether systematic selling is on the boom.
The indicator also has a great potential in tracing divergences in the market, which is a characteristic that cannot be matched to any other simple indicator. In case a price gets to a new high, the BOP indicator does not confirm this movement, which indicates a price divergence.Balance of Power | Indicator Series Click To Tweet
Uses of Balance of Power indicator
A trader can use the indicator in the following ways:
• Identification of trend direction
• Getting divergence between the price and the BOP to identify a potential trend reversal or a continuing trend setup.
• Making full advantage of oversold/overbought market conditions.
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