Balance of Power (BOP) indicator in Cryptocurrency: how to use it to analyze the strength of buyers and sellersBalance of Power (BOP) is an analysis indicator with which you can measure the market positions of buyers and sellers within a set time period.
The indicator allows you to set and evaluate the prevailing mood in the market. With technical analysis with BOP, you will be able to accurately determine the most relevant trend, recognize exit and entry points, and identify overbought and oversold positions.
For the first time Balance of Power was presented in 2001 in the magazine "Stocks and Commodities". It was developed by Igor Livshin, according to whom the indicator evaluates the strength of "bulls" and "bears" and their ability to push the price indicator to an extreme level.
The BOP indicator can be used to analyze any assets at any time interval. The balance of power does not generate signals on its own, but it helps to come to a rational decision. Despite the external similarity with oscillators, BOP still has distinctive features: it does not take into account the depth of fluctuations and the presence/absence of a trend, and also does not determine divergence.
The main advantage of the indicator is an instant market assessment based on the principle of "here and now". With BOP, you can assess the market mood in multiple screens. Looking at the indicator from different time periods, you can understand how the balance of power of traders and the emerging trends are developing. Try to use this indicator as an additional element in the developed strategy.
The principle of operation of the BOP indicatorThe indicator is based on the formula (CL – OP) / (HI – LO).
Using these raw daily values leads to an unstable oscillator, so you can smooth out the initial value by applying a moving average line in the analysis. The value is plotted in the form of a line or histogram. Livshin recommends smoothing using a 14-period SMA, but the number of periods can be changed according to the schedule.
The balance of power indicator shows the direction and degree of price change during the trading period. Like most oscillators, this strength indicator can be used to determine trends, deviations from the price and overbought or oversold conditions. Crossing the zero line gives buy and sell signals.
The Balance of Power value ranges from -1 to +1. The value of zero is set as the central axis. If the value turns out to be in the positive plane, the advantage of forces is on the side of the "bulls", if in the negative plane, sellers dominate. A value close to the zero plane indicates the balance of forces between them and may mean a reversal of the established trend. Although the main signal given by the balance of power indicator comes from crossing the zero line, it can also be used to determine the trend, search for price discrepancies and determine whether the cryptocurrency is overbought/oversold.
The ascending BOP line indicates an uptrend, and the descending BOP line indicates a downtrend. Crossing the zero line confirms the trend change. When the price reaches new highs, but the BOP does not, it is a negative divergence. These discrepancies may portend a trend change.
You will also need to look at the historical levels of the cryptocurrency you are analyzing to determine what should be considered overbought or oversold. As soon as overbought or oversold levels are set for this currency, look for dips beyond these levels.
