The balance of power (BOP) indicator was developed in the 1950s by Don Worden. The indicator is independent from price and instead reflects the accumulation and distribution between buyers and sellers.
One easy way of reading the BOP is by analyzing its movements above and below the zero line. To put it simply, the market is said to be in the process of accumulation (buying) when it turns above zero and in the process of distribution (selling) when it’s below zero.
Balance of Power (BOP) Signals: Divergences
Besides getting a feel for whether buyers or sellers are in control by the fluctuations of the zero line, the BOP can also be used to spot potential reversal points that come in either bullish or bearish varieties.
- A bullish divergence is when prices form lower lows while the BOP forms higher lows.
- A bearish divergence is when the market forms highers highs while the BOP forms lower highs.
These divergences can appear on any time scale: from minutely through to monthly charts. It’s important to note that the longer the time scale, the more significant (and reliable) a signal is, thus a divergence appearing on a monthly chart should carry more weight than one that appears on the daily timescales.
Weaknesses of the Balance of Power
Like all indicators, the BOP is an imperfect indicator. Although it is effective in showing a peak of the accumulation and distribution between buyers and sellers, it should not be solely relied upon. Other clues should be taken from different indicators such as pivot points, the MACD, RSI, and others.
Finally, although the BOP can generate reversal signals, these signals are not guaranteed to last as people can and do change their minds.
The BOP should instead be used as a complementary tool along with other indicators if one is to make the most out if it.