What Is The Balance Of Power Indicator & How To Trade With It

Balance Of Power Indicator Explained

The Balance of Power indicator developed by Igor Livshen is a typical oscillator that indicates trend continuation and reversal. The Balance of Power indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

What is the Balance of Power indicator?

The Balance of Power indicator is a technical analysis tool. It continually measures the balance between the market power of buyers and sellers. It helps traders to determine the dominant sentiment at the moment. Traders can use this indicator to:

  • Identify the direction of a trend.
  • Find discrepancies between the price and the BOP to identify a potential trend reversal or continuation of the trend.
  • Identify the overbought and oversold conditions.

Once applied, it appears at the bottom of your chart.

Balance of Power on chart
Balance of Power on chart

Principle behind the power Balance of Indicator

The most important principle regarding the Balance of Power indicator is as follows:

  • When the signal line is above the zero line, a positive market sentiment prevails. Buyers have the upper hand.
  • When the signal line is below the zero line, a negative sentiment prevails. Sellers dominate the market.

The indicator traces the prevailing market conditions in real-time. The Balance of Power indicator may look like any other simple oscillator but it is not. It works differently from other oscillators and indicators. It does not react to the upward and downward price movements, as many indicators and oscillators do. Instead, it has its formula to work.

Let’s take a look at its calculation.

Balance of power = (closing price – opening price) / (high price – low price)

If you want to calculate the hourly Balance of Power, you will subtract the opening price of the 1-hour candle from the closing price. Divide what you get by the value of (the highest price in 1-hour candle minus the lowest).

How to configure the power Balance of Power indicator in mt4?

You can configure the Balance of Power indicator in Metatrader in the following steps:

  • Place the indicator file in “indicators” folder of your MT4 platform.
  • Go to navigation panel and choose the Balance of Power indicator from the list of custom indicators.
  • Click ok to apply the indicator.
Balance of Power indicator installation in MT4
Balance of Power indicator installation in MT4

How to use the Balance of Power indicator?

The Balance of Power indicator can provide signals to help traders to trade online. Let’s see how the indicator is used for trading.

The Balance of Power indicator provides the following signals on the platform:

  • Cross over zero line
  • Convergence
  • Divergence

Cross over zero line

This is the basic trading signal that the Balance of Power indicator gives. Suppose that the signal line of the BOP indicator crosses the zero line from bottom to top and continues to increase. It’s a bullish signal. The signal line of the Balance of Power indicator crosses the zero line from top to bottom and continues to decrease. It’s a bearish signal.

Trading zero line in Balance of Power
Trading zero line in Balance of Power

Convergences

This occurs when the Balance of Power is in line with the market price. If the market makes two higher peaks in an uptrend, the BOP indicator also makes high peaks consecutively. It is a signal that the price will go up or at least retest the most recent ones. The reverse is also true with a downtrend.

Convergence in Balance of Power
Convergence in Balance of Power

Divergences

These occur when the Balance of Power indicator is not synchronized with the market price. In an uptrend, the market achieves two consecutive higher peaks. The BOP indicator takes a higher peak and then another higher peak, which is not as high. This means that the trend may soon reverse. The same applies to a downward trend.

Divergence in Balance of Power
Divergence in Balance of Power

Balance of Power trading strategy

Here, we present a simple trading strategy solely based on Balance of Power indicator. However, you can combine with other indicators to filter the trades.

Balance of Power buy strategy

  • The indicator bar should be green (positive).
  • The moving average (blue line) should be above the zero line.
  • Stop-loss can be placed below the recent low.
  • You can exit the trade once the indicator bar turns red (negative).
Balance of Power buy trading signal
Balance of Power buy trading signal

Balance of Power sell strategy

  • The indicator bar should be green (positive).
  • The moving average (blue line) should be above the zero line.
  • Stop-loss can be placed below the recent low.
  • You can exit the trade once the indicator bar turns red (negative).
Balance of Power sell trading signal
Balance of Power sell trading signal

Balance of Power conclusion

I would prefer to use the majority of technical indicators such as the Balance of Power indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Balance of Power indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Balance of Power indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Balance of Power indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!