Definition

The Balance of Power indicator measures the internal strength of each trading bar to gauge the relative power between buyers and sellers in the market. This is done by calculating a ratio that compares the difference between the closing and opening prices to the range between the high and low prices of that bar. The indicator values range from -1 to 1; a value of 1 suggests strong buying pressure, while -1 suggests strong selling pressure. A value of zero indicates a balanced power struggle between buyers and sellers.

Suggested Trading Use

Traders can use the Balance of Power to identify the underlying sentiment in the market. Positive values are generally interpreted as bullish, implying that buying pressure outweighs selling pressure, and could be a good opportunity to enter a long position. Conversely, negative values are seen as bearish, suggesting that it might be a good time to consider a short position or exit a long one.

It's also helpful for spotting divergences: if the price is making new highs but the Balance of Power is not following suit, it could indicate a weakening trend and possible reversal. Similarly, if the price is hitting new lows but the Balance of Power is not decreasing, this could indicate the downward trend is losing steam.

By adding the Balance of Power to their suite of trading tools, traders can better understand the underlying market sentiment. This study is particularly beneficial for traders who wish to gauge the power balance between buyers and sellers in real-time.