Balance of Power Technical Analysis and Balance of Power Forex 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 price to extreme levels.
Technical Analysis and Generating Forex Trading Signals
When using this technical indicator, the zero line crossovers are used to generate Forex signals.
The center is marked as the zero line, levels oscillating above or below are used to generate trading 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 Signals
When the BOP crosses above zero a buy signal is given.
Also when the BOP is rising, the market is in an upwards 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 whipsaw.
When the BOP crosses below zero a sell signal is given.
Also when the BOP is declining, the market is in a downwards 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 whipsaw.
Sell and Buy Signals
In FX trading, divergences between the BOP and price can be used to effectively identifying potential reversal and/or trend continuation points in the currency movement. There are several types of divergences:
Classic Divergence - Trend reversal signal
Hidden Divergence - Trend continuation
Trading 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 warning for potential 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, price may also stay at these overbought and oversold levels and continue moving in that direction for a while and thus its always good to wait until the BOP crosses over the Zero mark.
From the example below, even though the Balance of Power showed the price was oversold, price continued moving downwards until the indicator crossed over to above Zero.