Who's The Boss?
Balance Of Power
by Igor Livshin
Who's in charge, bulls or bears? It doesn't take higher-order math to get a good reading.
The balance of power (BOP) indicator measures the strength of the bulls vs. the bears by assessing the ability of each to push price to an extreme level. I deliberately developed BOP not to be a range-bound indicator, so it is as sensitive at extreme points as it is at other levels.
Every day, bulls and bears compete with each other in the marketplace. The idea behind the BOP calculation is to assign a score for both bulls and bears based on their daily performance related to price movement.
For each market day, the indicator is calculated by using the formulas shown below. First, three reward values are calculated for bulls and bears:
1. Reward_Based_On_OpenEach reward is calculated relative to the full price movement for that day (HighPrice-LowPrice).2. Reward_Based_On_Close and
3. Reward_Based_On_Open_Close.
REWARD BASED ON THE CLOSE PRICE
This value measures the ability of each competing group - bulls and bears - to push the opening price in opposite directions (bulls up and bears down). The result of their efforts is registered by the high and low prices (Figure 1).
REWARD BASED ON OPEN-CLOSEFigure 1: Scoring. Bulls and bears are each rewarded by their success in pushing price around. Here's one of their rewards based on movement from the open. BullsRewardBasedOnOpen = (HighPrice - OpenPrice)/(HighPrice - LowPrice) BearsRewardBasedOnOpen = (OpenPrice - LowPrice)/(HighPrice - LowPrice)
This value measures the ability of each competing group (bulls and bears) to reach the closing price from opposite directions (bulls up from the low price and bears down from the high price). (See Figure 2.)
Figure 2: Reward based on the price of the close. BullsRewardBasedOnClose = (ClosePrice - LowPrice)/(HighPrice - LowPrice) BearsRewardBasedOnClose = (HighPrice - ClosePrice)/(HighPrice - LowPrice)
...Continued in the August 2001 issue of Technical Analysis of
STOCKS & COMMODITIES
Igor Livshin is a private trader. He can be reached by phone at 312 822-6356 or by e-mail at microworksoftware@yahoo.com. His website can be found at microworkresearch.com/mo/index.html.
Excerpted from an article originally published in the August 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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