Balance of Power (BOP)

Definition

Balance of Power (BOP) is a price-based indicator used by technical analysts to evaluate the overall strength of buyers and sellers in the market. BOP oscillates around zero line, where positive values indicate Bull market dominance and negative values indicate Bear market dominance. On its own, BOP is not a particularly smooth indicator, and is therefore best paired with an indicator that can counter this by providing essential smoothness. By pairing the BOP with the Simple Moving Average (SMA), for example, the result is a smooth, proper analysis for viewing.

History 

The Balance of Power (BOP) indicator was developed by Igor Livshin and was later introduced to the public in 2001 via Stocks and Commodities Magazine. BOP measures price trends by evaluating the strength of buyers and sellers within the market and determining in which price is pushed to extreme highs and lows. 

Calculations

To calculate the Balance of Power, use the following formula:

Balance of Power = (Close price – Open price) / (High price – Low price)

Takeaways

Balance of Power (BOP) is known to oscillate around the zero center line, ranging from -1 to +1. A positive BOP indicates buyer market dominance, whereas negative BOP indicates seller market dominance. When BOP is equal to zero, it shows that buyers and sellers are equal in the current market.

What to look for

Keep in mind that BOP can be used to generate specific trading signals on the crossovers with its center line, suggesting the following:

1. Consider buying when the BOP becomes positive (crossing above the zero line) as it may imply that bulls are taking control.
2. Consider selling when BOP becomes negative (crosses below the zero line) as it may imply that bears are taking control.

Limitations

On its own, the Balance of Power indicator is quite choppy and is best paired with another indicator that can counter this with unparalleled smoothness. Oftentimes, this is paired well with the Simple Moving Average (SMA).

Summary

Balance of Power (BOP) is a price-based indicator used for technical analysis to determine the strength of buyers and sellers. On its own, BOP is not a particularly smooth indicator, and is therefore best paired with an indicator that can perform this, such as the Simple Moving Average (SMA).