Balance of Power Indices Technical Analysis and Balance of Power Indices Trading Signals
Developed by Igor Livshin
Balance of Power measures the strength of the bulls versus the bears by assessing the ability of each to push stock indexes price to extreme levels.
Indices Technical Analysis and Generating Indices Trading Signals
When using this technical indicator, the zero line crossovers are used to generate stock indices signals.
The center is marked as the zero line, levels oscillating above or below are used to generate stock indices 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 Indices Trading Signals
When the BOP crosses above zero a buy stock indices signal is given.
Also when the BOP is rising, the stock indexes trading market is in an upwards trend, some traders use this as a buy stock indices signal but it is best to wait for the confirmation by moving above the zero mark. As this will be a buy stock indices signal in bearish territory and this type of signal is more likely to be a indices trading whipsaw.
When the BOP crosses below zero a sell stock indices signal is given.
Also when the BOP is declining, the stock indexes trading market is in a downwards trend, some traders use this as a sell stock indices signal but it is best to wait for a confirmation by moving below the zero mark because this will be a sell stock indices signal in bullish territory and this type of signal is more likely to be a indices trading whipsaw.
Sell and Buy Indices Trading Signals
Divergence Indices Trading
In indices trading, divergences between the BOP and stock indexes price can be used to effectively identifying potential reversal and/or indices trend continuation points in the stock indexes price movement. There are several types of divergences:
Classic Divergence - Indices Trend reversal indices trading signal
Hidden Divergence - Indices Trend continuation
Trading Overbought/Oversold Conditions
This Balance of Power can be used to identify potentially overbought and oversold conditions in stock indexes price movement.
- Overbought/Oversold levels can be used to provide an early warning for potential indices trend reversals.
- These levels are generated when the indicator clusters its tops and bottoms thus setting up the overbought and oversold levels around those values.
However, stock indexes price may also stay at these overbought and oversold levels and continue moving in that direction for a while and thus it's always good to wait until the BOP crosses over the Zero mark.
From the stock indexes trading example explained and illustrated below, even though the Balance of Power showed the stock indexes price was oversold, stock indexes price continued moving downwards until the indicator crossed over to above Zero.