Technical indicators play an essential role for any trader in the market. At Day Trade the World (DTTW), we have been in a journey to help traders master most of these tools.
In the recent past, we have looked at some of the popular trading indicators like moving averages and the Relative Strength Index (RSI). We have also looked at several unpopular indicators like the Detrended Price Oscillator (DPO) and the Relative Volatility Index.
Today, we will look at the Balance of Power (BOP) indicator, which is one of the rarest.
What is the Balance of Power Indicator?
The Balance of Power (BOP) is a rare indicator that was developed by Don Worden in the 1950s. He published his ideas in a book known as the Evolution of the Cumulative MoneyStream and Balance of Power.
In short, the indicator assess the ability of buyers and sellers to drive the price of assets to extreme levels in the market.
This is important because, as we have written before, the price of financial assets is usually a battle between buyers and sellers.
The BOP usually oscillates between 100 to -100. Although in some instances it can rise above 100 and fall below -100, these instances are usually extremely rare.
In fact, it only happens in periods of extreme volatility in the financial market such as when the price of crude oil turned negative in April this year.
› How to Trade in Periods of High Volatility
How to calculate? The BOP Formula
The Balance of Power indicator is usually calculated in a very simple way.
|BOP = SMA of [ Close – Open) / (High – Low) ]|
As shown in the formula:
- You first need to take the close price and subtract the open price of the asset.
- Next, you need to take the highest price of the asset and subtract it from the low.
- After doing this, you need to divide the first answer with the second answer.
- Finally, you need to take the simple moving average of this.
Still, as we have written before, you don’t need to know how the indicator is calculated. Instead, you just need to know how to apply the indicator and use it in the market.
How to use the Balance of Power Indicator
The process of using the Balance of Power indicator is relatively difficult to most people, especially those who are just getting started. Therefore, we recommend that you focus on other indicators, which are equally good, if you are new to trading.
The first step of using the BOP is to install it to your trading platform. If you are using the MT5 or MT4, you will need to install it directly from the market. Alternatively, you can conduct your analysis in Trading View.
Next, you need to configure it on the chart. In this case, you just need to select the colour you want to use and the resolution. On resolution, you can select whether you want it to be in the same period as your asset.
Trader’s best practice
Traders use the Balance of Power Indicator in two main ways.
First, they look at the zero level for a prediction of where the price will move to. If it moves above zero, they believe that bulls have prevailed, which means that the price will continue rising. Similarly, if the price moves below zero, they believe that it is a bearish call.
Other traders use the indicator to find divergences in the market. A good example of the indicator is shown in the chart below.
Balance of Power: a good or bad indicator?
There are several cons of using the balance of power indicator. Some of these cons are:
- Not installed in most platforms – The balance of power is not installed by default in most trading platforms.
- Difficult to use – The BOP is difficult to use, especially to new traders.
- Signals hard to find – The signals of the balance of power indicator are relatively difficult hard to see.
There are several benefits of using the balance of power indicator. Some of these pros are:
- It is rare – It is a rare indicator, which means it can show you signals that are not easy to see.
- Can be used with other indicators – It can be used with other indicators like moving averages and RSI.
- Multi-assets – You can use the balance of power indicator across assets.
The balance of power is an important indicator that is used mostly by professional traders. Still, it is also a difficult indicator to use.
Therefore, if you are a beginner, we recommend that you use alternative indicators that are relatively easy to use. Still, if you strongly want to use the BOP, we recommend that you read the book written by Worden and then test it in a demo account.
External Useful Resources
- Balance of Power : Normal and Hidden Divergences – Tradingsim