Introduction

Traders use technical analysis to predict the future movement of a stock or any other asset using specific charts, indicators, patterns, etc.

The technical analysis indicates the future trends in stock by looking at the price movement. 

One such indicator is the Balance of Power. Let’s see what it means and how it helps in identifying price trends in stocks.

What is the Balance of Power?

Balance of Power is a price-based indicator that measures the strength of buying and selling pressure. 

When the indicator is positive, it means that the bulls are dominating the market and pushing the market to higher extremes.

When the indicator is negative, it means that the bears are dominating the market and pushing the market to lower extremes.

When the indicator is at zero, it means that there is a balance of power between the bulls and bears indicating a trend reversal in either direction.

As we can see in the above figure, the bulls dominate when the indicator is above 0 or positive, and bears dominate when the indicator is below 0 or negative. 

Whenever the indicator touches 0, there is a trend reversal either bullish or bearish.

Calculation of BOP

BOP was introduced by Igor Levshin and later published in August 2001 in the magazine “Technical analysis of stocks & commodities”. The formula to calculate BOP is:

BOP = (Closing Price – Opening Price) / (High Price – Low Price)

The indicator oscillates between -1 and +1. 

Interpretation of BOP

When the indicator becomes positive ( crossing above zero line) take it as a buy signal as the bulls are taking control over the market.

When the indicator becomes negative ( falls below the zero line) take it as a sell signal as the bears take control over the market.

When BOP is around zero, it is a sign that bulls and bears are equal in the market. 

Limitations of BOP

Just like any other technical analysis tool, BOP also has its own limitations.

BOP indicators are not very accurate for the identification of a trend. It may provide a bullish or bearish signal but may reverse after entering into a trade.

BOP cannot be used in isolation. It is useful only when paired with other indicators like Simple Moving Average (SMA).

Conclusion

The BOP doesn’t follow the price movement. It has its own way of functioning.

Traders need to look at the historical success rate of BOP before entering into a trade. If the BOP indicator has a good success rate, the trader can consider the trade.

It is advised that traders do not use BOP as the only indicator because it may generate false signals. It works best when combined with other indicators.