A Complete Guide to Balance of Power Indicator

The Balance of Power indicator or the BOP for short is a unique tool that gives traders an overview of the buyers' and sellers’ strengths. It can be used for different purposes. On the one hand, it helps to measure price trends when assessing the power of either bulls or bears. On the other hand, it makes it possible to evaluate the overall market strength as well as to measure the total power of sellers and buyers.

A tool is very easy to implement no matter how experienced a trader is. It will suit any trading strategy and tactics, which makes it quite flexible and handy despite the market conditions. It might work well for those who trade oil futures, stocks, gold, commodities, and currency pairs. Besides, it has a secret ability to expose hidden market activities such as Dark Pool.

In this article, we will have a look at how the Balance of Power indicator works. We will also reveal some handy recommendations to use it properly.

What Is the Balance of Power Indicator?

Igor Livshin is the founder of the BoP indicator. The tool made its debut back in 2001. It was firstly published in August as a separate edition for the Technical Analysis of Stocks and Commodities magazine. Since the origin, the indicator was used to measure the power of bulls and bears.

The tool is able to assess each side of the financial market (buyers and sellers) as well as lead prices to the extreme level. There is a specific formula to calculate BoP. To calculate it, you will need to:

  1. Deduct the open price from the close price (Value 1).
  2. Deduct the low price from the high price (Value 2).
  3. Divide Value 1 by Value 2.

As a result, the formula looks the following way: BoP = (Close price – Open price) / (High price – Low price)

Balance of Power Indicator Recommendations

To use the indicator properly, traders will have to follow specific recommendations established by the BoP founder Igor Livshin. They include:

  • Traders are supposed to use charts with a 14-day mobbing average plotted. Timeframes and market nature will define the number of periods that may vary.
  • The BoP bottoms and tops are the main indicator properties that define the uptrends and downtrends.
  • The Balance of Power indicator has the ability to assist price divergence, trends as well as overbought and oversold market conditions.
  • The trend changes in the BoP should be considered as a warning, but not a precise signal. Before making a move, traders are supposed to get confirmation.

Tips to Use BoP Indicator

As stated earlier, the indicator is very easy to use and implement. It does not require special knowledge or skills. However, using the tool will not be a walk in the park. It may still bring some challenges. The main difficulty is to specify whether the indicator follows the price or not. As a rule, it chooses its own way to follow depending on specific market conditions. Most traders follow two major concepts:

  1. If the indicator moves above zero, it creates a buying opportunity.
  2. If the indicator moves below zero, it creates a selling opportunity.

However, in reality, things are a bit more complex. BoP works in a unique way with the ability to move above or below a zero line no matter how the current trend moves. What’s more, the Balance of Power should never be used as a stand-alone indicator. It requires signal confirmation. This is where other technical indicators may come in handy as well.  

Balance of Power Indicator Limitations

Just like any other technical indicator, BoP is not a perfect tool. It has some obvious downsides. The main obstacle here is that these shortcomings can be crucial. For this reason, traders must take the following into account:

  • There is no guarantee for traders to enter a market with a short or long position despite the signal.
  • It cannot be used to identify the trend.
  • The indicator may reverse rapidly after delivering a bullish or bearish divergence signal.

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The Bottom Line

The Balance of Power indicator helps to retrieve information about buyers' and sellers’ patterns. It lets traders measure the market strength when plotted above or below a zero line. However, it should not be used as an oscillator. What’s more, it does not follow the price but acts in its own unique way instead. Despite all benefits, the tool comes with some significant cons. Besides, it should not be used as a stand-alone instrument. Traders will need to confirm signals using other technical indicators. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.