Balance of Power Indices Analysis & Balance of Power Trading Signals

Developed by Igor Livshin

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

Stock Indices Analysis and Generating Trade Signals

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

Center is marked as the 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 Trading Signals

Buy Signal

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

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

Sell Signal

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

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

Sell and Buy Trading Signals

Divergence Stock Indices Trading

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

Classic Divergence - Trend reversal signal

Hidden Divergence - Trend continuation

Indices Overbought Oversold Conditions

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

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

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

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

Analysis in Stock Indices Trading