Forex Techical Indicators that really work: Balance of Power (BOP)

Balance of Power (BOP)

In this article, I’m going to talk to you about balance of power, or BOP©. BOP tells us whether the underlying action in the trading of a stock is a characteristic of systematic buying accumulation or distribution. Look at Figure 1 for a classic BOP example: it’s plotted by looking at the accumulation that occurs above or below its zero line, which I call a level line or center line. It represents this institution’s buying and selling of shares totaling 10,000 or more. The more buying you have, the higher the stock will go; and, the more selling you have, the lower the stock can go. And of course, if you have a lack of buying or selling, it’s neutral, which often is a sign that the stock will trend sideways until the buying or selling increases.

FIGURE 1

If someone were to buy or sell 100,000 shares of one individual stock, would it make a difference in the price of that stock? Definitely. I’m now going to tie this together with some other technical indicators to see whether it will enhance our opportunity to assume a long or short position.

Balance of Power (BOP) indicates whether the underlying action in a stock trade is a characteristic or a systematic buying accumulation

or distribution.

Bullish BOP

Figure 2 exhibits positive BOP. As everyone knows, a green light normally represents go, yellow means caution, and red says stop—unless you’re in New York, where it might mean speed up!

FIGURE 2

What we’re looking at here is some accelerated institutional selling. I’d call this a change of character—we’ve gone from bearish, to neutral, and now to bullish. It’s a good sign that institutions are starting to buy.

A change of character is when a stock shifts from bearish to bullish or bullish to bearish.

You may prefer to be very cautious and wait until you also see your moving average cross over the center line—the zero level. Once a moving average has crossed over and you have entered the trade, there’s nothing wrong with being cautious and waiting until it gets to $10, then riding it to $14.

Count on 12-Day Moving Averages
I have found that 12-day simple moving averages often work best because when I’ve used shorter ones—I’ve tried 9 and 10 in the past— I’ve entered trades too early. I’ve also tried 14 and 15 and found that I’ve missed out on a low opportunity. I don’t mind missing out on these opportunities; there are times in the market where you can actually only get a $1 or $2 out of a stock but I’m more of a position trader and not a day trader. My motto is “get in when it’s technically time to and get out when you’re told to.” Sounds like something my dad said to me as a child, “get in your room and don’t come out until I tell you to, or else.”

That’s why I put a moving average on just about everything because it teaches me to be a bit more cautious when markets are a little uncertain.
Again, you can see a bullish stock here in Figure 2. We have a change of character in the institutional BOP. We have the price of the stock above its three selected moving averages, and we have a moving average increasing above the zero level. That’s becoming a bullish signal as well.
Figure 3 exhibits a chart that shows us bullish volume and BOP. Again, we’re using the same stock that we just considered; only, we’re adding more indicators to it.
You should start to see a pattern here: the more you use different indicators (provided they are bullish), the greater the odds in your favor. If the indicators are in fact bullish, you should continue to consider this an opportunity to move ahead. Here, we still have the

FIGURE 3

positive BOP and the moving average crossing up, with an increase in volume at the same time.
This was an example of a 12-day simple moving average. If I went with a longer, 15-day average here, I would probably have seen only
$1.50 to $2.00 out of the stock. So 12 days is the parameter that I found to work best in this situation.

The more you use different indicators, the greater your odds of success will be.

Count on your Market Snapshots
We’ve talked about the BOP, which is institutional buying and selling. This concept reminds me of all the family photos my mother has hanging up on the hallway wall of her home. Mom would say that those pictures are priceless for the memories they contained. The same holds true for these “snapshots” of the market, as they’ll give you the priceless technical information you’ll need to get into and out of trades. This approach is a far cry from the one I relied on when I started trading where, for example, I’d buy Wendy’s stock if the hamburger was good.

Bearish BOP

Now, in Figure 4, we have a chart showing the opposite—bearish, volume, and BOP—because we know that the stock market doesn’t always go up. Starting at the top of the chart, we see that the trend has changed. The stock is moving in a lower direction. There is increased volume, which has risen above the moving average. That’s a bearish signal.
We also have a change of character of the opposite side. Before, the BOP represented institutional buying. It now demonstrates insti tutional selling and, as you can see, it’s even greater. Odds are, this stock will continue to move lower at this time.
In summary, we’re using moving averages to help us identify when to enter or exit a trade. We are making sure that we see the price of the stock stay above or below those moving averages for 3 con-

FIGURE 4

secutive days before acting. We’ve added some moving averages to volume because we must have increasing volume on these stocks to confirm that an increase is indeed the current trend. And the moving average that we’ve been using is a 12-day. Upward acceleration would be a positive thing if we were considering shorting the stock.
Using technical indicators provides you with priceless market “snapshots” that can help you get in and out of trades.

Enron, Tyco, Lucent: History Reveals BOP’s Beginnings
I hate to beat a dead horse, but if you go back and look at Enron, you’ll see that something like BOP divergence was occurring a long time ago—well before the company ever started its downslide. Similar processes happened with Tyco, Lucent … We could go on and on. All were good companies. However, we as individual investors, had nothing to do with where that stock was going to go. The institutions ultimately determined what would happen to the stock because they identified signs of weakness in the stock they sold long before the stocks dropped

BOP Divergence

Now let’s talk about BOP divergence—a very, very important concept. As you can see in the graph featured in Figure 5, we have a stock that has dramatically increased in price within 3 months, from 40 to about 52. That’s a good move upward.
But do you see what’s occurring down below at the same time? Institutional selling. As much as we all like to think that we can control the market, our little 100, 200, and or 1,000 shares ultimately don’t make a difference. But if an institution is starting to sell, yet its price is moving higher, does this mean that the Stock Market Exchange is trying to trick us into buying it? The answer could be yes.
Simply put, they are raising the asking price on the stock, assuming that people will just accept the increase as a sign of how most

FIGURE 5

people buy: “Oh, today it’s at 43. Oh, today it’s at 45. I should have bought; I didn’t buy. Now it’s at 45.50; it’s going higher. I bought it.” The moral is: stay away when you see this picture of divergence with stocks moving up. Buying stocks that are moving higher is great but not if the volume is dropping while the price is increasing.
If an institution is starting to sell, yet its stock price is moving higher (a.k.a. BOP divergence), it’s a sign that the Exchange is trying to trick you into buying so be careful and purchase small amounts first to avoid any sudden drop of the stock.
I developed the chart in Figure 6 about a year ago, after having a gentleman from Canada, whom I’ll call Dr. Mike, come down and spend some time with me in private training. I tested the information in it for 6 months. The observance contained here was essentially Dr. Mike’s, and I want to share it with you.
This tight grouping of three moving averages is an indication that the stock price will soon make a major move up or down. That’s all we’re looking for, right? We don’t care if the stock market goes up or down. We may care if it goes sideways, as that movement provides less opportunity. But if it makes a major move up or down,

FIGURE 6

Serious Time in Tracking Technical Indicators
I usually look at technical indicators for 12 to 15 hours a day. I’ll run
all kinds of different parameters, back-test them, and then try them. I have several laptops that no one else touches, and I’ve set them up with all these different parameters and scans for different tests. Then, I test the parameters over and over for a minimum of 6 months or more.

that gives us a good opportunity to invest to the long side—or an even better opportunity to invest to the down side. The value of other technical indicators will also play a major role in determining the direction of the breakout and a proper entry point.
Note that the three moving averages in Figure 7 are all touching. If you ever see this, you better start running to the bank! I built a scan looking for the 20-, 50-, and 200-day moving average to come together and touch, which tells me that this stock is going to make a major move in one direction or the other. There’s a lot of opportunity for this $50 stock to make a major move—like going to $100 or even zero.

If a scan shows these three moving averages touching at one point, it's a sign that the stock will soon makea major move in one direction or the other.

As you can see, the key to making money in the stock market is about just finding the right stocks—and the only way to do that is to have the right technical indicators with the right parameters.
Look again at Figure 7. If you see a grouping happen, pay close attention to it. Again, I would not jump in and trade this before the rule says it will make a major move to one direction or the other, that is, up or down. I’ll use other technical indicators, and when I get to the final tab number 12 of my system, I’ll really decide whether to enter the trade or not.

FIGURE 7

Article Summary

• Balance of Power (BOP) indicates whether the underlying action in a stock trade is a characteristic or systematic buying accumulation or distribution.
• The level or center line in BOP represents a stock’s accumulation above or below its zero line.
  
• When a stock shifts between bearish, neutral, and bullish, that shift shows a change of character.
  
• You’ll have greater odds if you rely on many different indicators and not just one.
  
• Be careful if BOP shows signs of a divergence, when a stock dramatically increases in price with simultaneous institutional selling.

• BOP is similar to Accumulation/Distribution when using other charting programs.
  
• View technical indicators as priceless market “snapshots” that can assist you in getting into and out of trades.
  
• When you see three moving averages touching at a single point, consider it a sign that the stock will make a big shift.
  

Self-test questions

1. When Larson refers to the term “change of character” he’s saying the inductor is changing direction from positive to negative or negative to positive?
   
   1. True
   2. False
2. BOP indicator helps identify:
   
   1. Retail investors buying small amounts of stock
   2. Retail investors selling large amounts of stock
   3. Institutional investors shorting then market
   4. Institutional buying or selling of large quantities of stock
3. How many Moving Averages is referenced when referring to the term a “grouping of the moving averages?”
   
   1. 2 moving averages
   2. 3 moving averages
   3. 4 moving averages
   4. 4 or more
4. The tight grouping of the moving averages is an indication that the stock price will move?
   
   1. Up
      
   2. Down
      
   3. Both
      
   4. One direction or the other
      
5. If looking for the moving average break outs you should use what parameters of your moving averages:
   
   1. 10 30 100
   2. 20 100 200
   3. 20 50 200
   4. 30 100 200