Balance of Power Analysis & Balance of Power Trading Signals

Created by Igor Livshin

Balance of Power indicator measures the strength of the bulls versus bears by assessing the ability of each to push price to extreme levels.

Trading Analysis & Generating Trading Signals

When using this indicator, the zero line crossovers are used to generate trade signals.

Center is marked as a zero line, levels oscillating above or below are used to generate trade signals.

Buy - The scale is marked from Zero to +100 for bullish market movements

Sell - The scale is marked from Zero to -100 for bearish market movements

How to Generate Buy and Sell Signals

Buy Signal

When the BOP crosses above zero a buy trade signal is given.

Also when the BOP is rising, the stocks market is in an upward trend, some traders use this as a buy stock signal but it is best to wait for the confirmation by moving above the zero mark. As this will be a buy stock signal in bearish territory and this type of signal is more likely to be a whipsaw.

Sell Signal

When the BOP crosses below the zero a sell stock trade signal is given.

Also when the BOP is declining, the stocks market is in a downwards trend, some traders use this as a sell stock signal but it is best to wait for a confirmation by moving below the zero mark because this will be a sell stock signal in bullish territory & this type of signal is more likely to be a whipsaw.

Sell & Buy Trading Signals

Divergence Trading

In trading, divergences between the BOP and price can be used to effectively identifying potential reversal &/or trend continuation points in the stocks price movement. There are several types of divergences:

Classic Divergence - Trend reversal stock signal

Hidden Divergence - Trend continuation

Stocks Overbought-Oversold Conditions

This Balance of Power can be used to identify potentially overbought and oversold conditions in price movement.

• Overbought/Oversold areas can be used to provide an early signal for potential stock trend reversals.
• These levels are generated when the indicator clusters its tops & bottoms thus setting up the overbought and oversold levels around those values.

However, price may also stay at these overbought and oversold levels & continue heading in that direction for a while and thus it's always good to wait until the BOP crosses over Zero mark.

From the stocks trading example shown and demonstrated below, even though the Balance of Power showed the stocks price was oversold, price continued moving downwards until the indicator crossed over to above Zero.

Technical Analysis in Stock Trading