Balance Of Power indicator or BOP measures the power that the buyers and sellers have. It’s a very volatile indicator. It goes up and down very often. It also determines market strength by assessing the strength of total buyers against that of total sellers and their ability to drive the price to extreme ends.
More on the Balance of Power Indicator
The BOP is an indicator, and typically not an oscillator. BOP moves along a zero line. When the balance of power indicator is above zero lines, it indicates buyers are in control. Similarly, when BOP goes below the zero lines, it shows sellers are strong. There are divergences also. Divergences are of two types, regular and hidden.
Balance Of Power indicator Formula
The formula or calculation of the BOP is (CLOSE – OPEN) / (HIGH – LOW)
How to set up Balance of Power Indicator on the charts?
Setting up the BOP on Zerodha Kite
The BOP indicator is present in the Studies section in Zerodha Kite. Open up your favorite stock chart and attach the indicator by accessing the Studies section. Here you can choose the parameters you want to use for the BOP indicator.
By default, BOP considers a 14-day period and a simple moving average. But the default parameters can be modified as per own demand. You can increase or decrease the period. Instead of the simple moving average, you can choose other types of moving averages. There are Exponential, Time-Series, Triangular, Variable, VIDYA, Weighted, Welles Wilder, Hull, Double Exponential and Triple Exponential types of MA also. Here the indicator oscillates between +1 and -1.
Setting up the BOP on Upstox Pro
The Balance of Power indicator is also available on the Upstox Pro platform. Similar kinds of setting like Zerodha here too can be applied on the charts.
How to trade using the Balance of Power Indicator?
- The BOP indicator works almost in all the time frames.
- As can be seen in the picture below, a buy position is created when the BOP indicator goes up from below the zero line indicating price reversal.
- The buy position is closed when the BOP indicator tops above zero line and starts coming down accompanied by a downward movement of price.
The Zero Line Reject
We can see the zero line can act as a good support or a resistance. In case of a strong trend in the market, the Balance of Power Indicator founds great support or resistance near the zero line. It tests the zero line and could not sustain there and either falls back (sell) or rises up (buy). This can trigger a pullback entry with low risk and high return. This strategy is similar to the ZLR in the Woodie CCI indicator. Watch the image below for a perfect short sell setup.
Here I have used a Hull Moving Average (HMA) for confirming the trend. When the price is moving below the HMA the trend is down. Now if the BOP tests the zero line but could not stay there and falls down it is a low-risk entry in the short sell trade. A similar strategy can be used for a buy setup too. Instead of the HMA, you can also use SuperTrend for confirming the trend.
Trading the Balance of Power Indicator Divergence
The BOP can also spot divergence nicely on the charts. Whenever the price move up and makes a new high but the BOP can’t make new highs it is a negative divergence. Similarly, when the price moves down and makes new lows but the BOP is unable to make new lows it is a positive divergence. The divergence can indicate a probable change of trend. You can enter a trade in the opposite direction using any trend line break.
Trading as an overbought oversold indicator
The Balance of Power indicator can sometimes be traded as an overbought oversold indicator too. For this, we have checked some historical levels. We have noted that the BOP dipping close to -0.5 triggers major rallies in the Nifty index.
As an example on 18th November 2016, the BOP dipped close to -0.5 in the daily charts. This triggered a major rally that lasted for the next 22 months before any significant correction. Once again the BOP dipped close to -0.5 at the end of day charts on 5th October 2018. That again formed a bottom and market rallied a lot till the last high. Watch the image below.
The Balance of Power Indicator oscillates between +1 and -1 in the Zerodha Kite platform. Traders can use this indicator for a buy signal and sell signal as per the zero line cross. Some low-risk pullback entries can also be taken using the zero line reject strategy. Another kind of trading this indicator is to follow its divergences. Sometimes, this indicator can also be traded as an overbought oversold indicator specially in the Indian indices.