Full Review of the Balance Of Power Indicator for Binary Options Trading
Balance of Power is an indicator developed by Igor Livshen. His method is to measure the balance of bulls and bears by analyzing extreme movements over a set time period. This indicator is an Oscillator and histogram similar to MACD and one with a lot of potential for binary traders.
What is the Balance Of Power Strategy?
A balance of power in political terms is when no one nation, region or state has the ability to dominate another. This balance keeps each in check, when one nation tips the scales then war can ensue. This same theory is true in trading. Igor Livshen understood the parallels and developed the Balance Of Power Indicator. This indicator is a histogram that presents like MACD and is one with that I think binary traders will flock to. The theory is simple, when one side of a trade or the other is able to make more extreme moves than the other then the balance of power is tipped in its favor.
So, What is Really the Balance Of Power Indicator
The indicator is actually very simple and one that is easy to program into MT4 and other trading platforms (Find the Original Formula at the bottom of page). To calculate each days balance simply subtract opening price from closing price and then divide that by the high price minus the low price. Each days balance is displayed as a bar, forming a histogram with high and low peaks. To further enhance the indicator a moving average of the balance can be taken as well.
- Balance of power = (closing price – opening price)/(high price – low price)
What Kind Of Signals does Balance Of Power Give
Balance of power gives several kinds of signals, can be used in multiple time frames and with other indicators. Like the MACD histogram this one gives signals with zero line crossovers, convergences and divergences. It can be used to measure trend strength, confirm trend direction, predict corrections and potential areas for reversal. When used in multiple time frames and with other technical analysis tools such as Fibonacci, trend lines or candlesticks it becomes even more useful.
The basic signal is a zero line crossover. This tool can be used to trade crossovers in either direction provided you use an appropriate option expiry. A trend following crossover is a stronger signal and has a longer out look. For example, a trend following crossover on a chart of daily prices may be good for a movement lasting a few days to a few weeks. A contrarian crossover on the daily charts may only signal a market movement of a few hours or days. I highly recommend that newbies stick to trend following signals until you get a good grasp on the market.
Convergences occur when the Balance Of Power makes consecutively higher/lower peaks in tandem with the market. In a down trend if the market makes two lower peaks and the Balance of Power makes consecutively lower peaks as well this is a convergence and signals that prices are going to move lower or at least retest the most recent lows. This is a good time to wait for a pull back and then get into a trend following trade. This pull back may precede a zero-line crossover which would then become a strong signal to get in.
Divergences are when the Balance Of Power makes consecutively lesser peak while the underlying asset are making a greater peak. In a down trend if the market makes two consecutive lower peaks and the Balance of Power makes a lower peak and then another peak that is not as low that is said to be divergent and indicates an area of potential support and/or market reversal. Divergences are one of the hardest things to trade on and not recommended for newbies.
Why this Indicator does Not Suck
This indicator does not suck. It uses a sound theory, presents an easy to read indicator and gives a wide range of useful signals. I like this indicator and think it could be interchanged with MACD in any strategy. It is a good trend following indicator for newbies and also provides more advanced signals for intermediate and expert traders.
Why this Indicator Might Suck
This indicator might suck for the same reason that all indicators might suck. When used by itself it may provide more whipsaws and false signals than you can handle. For that reason I suggest using it with other tools and a firm foundation in fundamental analysis.
My Last Words On The Balance Of Power Indicators
I really like this indicator. It has a simple formula based on a sound theory, gives good signals and is easy to use. I can recommend this indicator for newbies and experts alike without any trepidation. Use this tool with confidence and trade on the balance of power.
Click here for the MT4 Balance Of Power Formula