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Use of Formula to Determine the Balance of Power Indicator

Introduction

  • For daily charts, a 14-period moving average is advised. Nevertheless, the number of periods may change based on the market and timeframes.
  • One of the Balance of Power BOP indicator’s key characteristics is the level at which its bases and tops cluster. Its highs frequently reach the maximum limits during uptrends and never return to the bottom level; during downtrends, the situation is the opposite.
  • The BOP indicator helps identify trends, oversupplied levels, and price regional differences.
  • A shift in the Balance of Power BOP trend is viewed by traders as a warning, and it is prudent to check whether the price has changed direction as well.

History

Igor Livshin designed the Balance of Power (BOP) indicator, which was subsequently made available to the general public in 2001 by way of Stocks and Commodities Magazine. BOP analyses the power of buyers and sellers in the market to determine which price is driven to extreme highs and lows to monitor price trends.

Calculations

Use this formula to determine the Balance of Power:

Balance of Power = (Close price – Open price) / (High price – Low price) 

Balance of Power vs. Accumulation/Distribution

The Balance of Power and the Accumulation/Distribution indicator are frequently compared. Both devices are oscillators, have a single signal line, and are unsettable. Their calculations are also quite comparable.

A/D, on the other hand, is a volume-based indicator that determines the trend’s direction using volume. The A/D aids in navigating the supply (distribution) and demand of the asset (accumulation).

How to use the Balance of Power indicator

Most people find it challenging to use the Balance of Power indication, especially those who are just starting out. As result, if you are new to trading, we advise that you concentrate on other indicators, which are just as useful.

Installing the BOP on your trading platform is the initial step in using it. You must install it straight from the market if you’re running the MT5 or MT4. Alternatively, you might use Trading View to carry out your analysis.

The chart needs to be configured next. In this instance, all you have to do is choose the resolution and color you wish to utilize. You can decide if you want the resolution to take place during the same period as your asset.

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Trader’s best practice

The Balance of Power Indicator has two main applications for traders.

Traders start by examining the zero level to determine where they think the price will go. They believe that bulls have won if it rises over zero, indicating that the price will continue to rise. In a similar vein, they consider it a bearish call if the price drops below zero.

The indicator is used by other traders to spot market divergences. The chart below provides a fair illustration of the indicator in use.

Trader's best practice

Balance of power strategies

In order to discover reversals, overbought and oversold levels, and even divergences, most traders use oscillators. People employ indicators like the Stochastic, MACD, and Relative Strength Index in this way.

However, in our experience, using this indicator to discover divergences, reversals, and overbought and oversold levels can be rather difficult. This is just a result of the indicator’s fluctuations, which make it challenging to utilize.

Even worse, using it in conjunction with other indicators like MACD and moving averages is challenging.

The limitations of the Balance of Power indicator

The BOP indicator has some drawbacks just like the other technical analysis tools. These drawbacks are so important that traders should consider them before placing their entire faith in the Balance of Power indicator. These are the restrictions:

  • The inside look into the distribution or accumulation provided by the BOP indicator does not obligate traders to open a long or short position in response to each warning.
  • For the detection of a trend, the BOP indicator is not well-known.
  • The BOP indicator generates signals for bullish and bearish divergences, but it may abruptly change direction after opening a position.

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Pros and Cons of Balance Power Indicator

Cons

The balance of power indicator has a number of drawbacks. Among these drawbacks are:

  • Not installed in most platforms – The majority of trading platforms do not come pre-loaded with The Balance of Power.
  • The BOP is difficult to use, especially for business traders.
  • Signals are challenging to spot – The balance of the power indicator’s signals might be challenging to spot.

Pros

The use of the balance of power indicator has a number of additional advantages. Among these benefits are:

  • It is uncommon and an erratic indicator that can reveal signals that are difficult to perceive (but, remember, these are also hard to spot).
  • It can be used in conjunction with other indicators, such as moving averages and the RSI.
  • The balance of power indicator can be applied to many assets.

Conclusion

Traders can learn about buyer and seller tendencies as prices rise or fall in response to systematic selling or systematic buying by using the Balance of Power indicator. Despite plotting above or below the Zero Line, the BOP indicator is not an oscillator. Prices are not followed by the BOP. It operates in a particular way.

To validate their trading position, traders can look for clustered bottoms or peaks from the Balance of Power indicator. Day traders should look up the success rate of the Balance of Power for their preferred stock in the historical records.

The traders can closely monitor the BOP for signals if the BOP has successfully produced signals to detect trends in the past. Technical analysts caution against using the Balance of Power indicator alone, though. It is because it could produce erroneous indications. Therefore, adding the Balance of Power indication is always the best course of action.

 

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