The Balance of Power indicator is a momentum oscillator that tells the difference between buying and selling pressure. It also measures the market’s overall strength, measuring the balance between the buyers and sellers.
Developed by Don Worden in the 1950s, the indicator oscillates between -1 and 1, where 0 acts as a middle point.
The Balance of Power tells the battle between the bulls and bears when it moves in the positive and negative territory.
The formula for the Balance of Power indicator is
BOP = (Close – Open) / (High – Low)
Close is the closing price of the bar.
Open is the opening price of the bar.
High is the highest point of the session.
Low is the lowest point of the session.
To calculate the Balance of Power indicator, you need to follow certain steps.
First, you need to calculate the opening, closing, and high and low prices.
Secondly, you need to subtract the opening price from the closing price and the lowest price from the highest price.
Then, you need to divide the values to get the BOP value.
The indicator doesn’t come with any settings. As for the timeframe, you should use the Balance of Power on higher timeframes to reduce market signals.
How to trade with the Balance of Power Indicator?
Like many other oscillators, you can use the Balance of Power indicator to identify the trend, find out overbought/oversold conditions, and locate divergences.
As the oscillator moves between -1 and 1, you can find the direction of the trend when it reaches above or below zero.
When the signal line crossovers above 0, it suggests there is buying pressure, and you can enter long positions or exit short ones. Conversely, when the signal line drop below 0, it means sellers are winning the battle, and you need to enter short.
When the signal line moves over zero and reaches 1, it starts to drift down, mentioning the overbought level. It means the buying pressure has been exhausted, and an uptrend is likely to end.
On the flip side, when the signal line crosses below zero, reaching -1, it starts to move up, indicating an oversold level. This suggests selling pressure has been exhausted, and a downtrend is likely to end.
It’s important to note that when locating overbought/oversold levels, you need to wait for the signal line to move above or below. Otherwise, in highly volatile conditions, it can move beyond 1 and -1.
The third way to trade with the BOP is by finding divergences. In the bearish divergences, the price makes higher highs, but the indicator makes lower highs. It means the bulls are exhausted, and there is a possibility of a trend reversal.
Conversely, in bullish divergences, the price makes lower lows, and the BOP makes higher lows. It mentions the exhaustion of bears, and there is a chance of trend reversal.
The chart above shows that when the price made a lower low, and the BOP made a higher low, the price reversed, thus satisfying a bullish divergence.
- The indicator is relatively easy to use.
- It is a range-bound indicator.
- You can use the BOP in multiple strategies.
Balance of Power vs. Accumulation/Distribution
Often, there is a comparison between the Balance of Power and the Accumulation/ Distribution indicator. Both are oscillators, have a single signal line, and don’t come with any settings. Also, their calculations are fairly similar.
However, A/D is a volume-based indicator that uses volume to identify the trend’s direction. The A/D helps navigate the asset’s supply (distribution) and demand (accumulation).
The Balance of Power indicator helps determine the trend’s direction by calculating the buying and selling pressure. The indicator measures the tussle between bulls and bears, and you can trade with it in multiple ways.
Although BOP works fine on its own, you can use other oscillators with it for further signal confirmation.