Balance of Power Indicator: Reading Who Won Each Candle

The balance of power indicator asks one blunt question about every candle: between the open and the close, who actually won the session, and by how much? It doesn’t care about volume, news flow or what the stock did yesterday. It looks at four prices on a single bar and turns them into a number between -1 and +1. That simplicity is exactly why it’s useful, and also why it can fool you if you don’t know what it leaves out.

We’ll go through where it came from, the formula, a full worked example with made-up prices, how traders read it, and the specific traps it sets for anyone trading Indian stocks that gap a lot at the open.

What the balance of power indicator measures

According to StockCharts ChartSchool, Balance of Power (BOP) is an oscillator that measures the strength of buying and selling pressure. It was introduced by Igor Levshin (ChartSchool also spells it Livshin) in the August 2001 issue of Technical Analysis of Stocks & Commodities magazine. Some platforms call it Balance of Market Power, or BMP, so if you can’t find “BOP” in your charting software’s indicator list, search for that name.

The idea is that buyers show their strength by pushing price to higher extremes and closing well above where the bar opened. Sellers show theirs by dragging price lower and closing below the open. BOP compares the distance travelled from open to close against the full high-low range of the bar. A positive reading means the bulls were in charge; a negative one means sellers dominated. A reading near zero says neither side got far.

The formula, and why it is so short

Levshin’s original method was fairly involved, but ChartSchool notes that it reduces to a much simpler version, which is what most platforms use:

BOP = (Close − Open) ÷ (High − Low)

Read the two halves separately and the logic clicks. The top part is the body of the candle, with a sign: positive for a green candle, negative for a red one. The bottom part is the whole range, wick to wick. So BOP is really “how much of the day’s range did the body cover, and in which direction?”

• A bar that opens at its low and closes at its high has a body equal to its range. BOP = +1.
• A bar that opens at its high and closes at its low gives -1.
• A doji, where open and close are nearly the same, sits close to 0 however wide the range is.
• A long-wicked candle with a small green body gives a small positive number. Buyers won, but barely, after a lot of back and forth.

Raw daily values jump around a lot, so the line is usually smoothed with a moving average. ChartSchool says Levshin recommended a 14-period simple moving average, and that you can change the period to suit the timeframe you’re charting. The smoothed line still lives between -1 and +1. To hit +1 on the smoothed line, a stock would have to open at the low and close at the high on every single bar in the averaging window, which almost never happens.

BOP doesn’t ask whether the stock went up. It asks whether the session’s own buyers beat the session’s own sellers, from the opening print to the close.

A worked example with made-up prices

Here’s a hypothetical stock over six sessions. These prices are invented purely to show the arithmetic; they aren’t from any real company. To keep the table short we’ll smooth with a 5-period average instead of 14.

Take day 1. The stock opened at ₹500, closed at ₹510, and the range was ₹512 minus ₹498, which is ₹14. So BOP is 10 ÷ 14, about 0.714. The body covered roughly 71% of the day’s range, upward. That’s a strong buyer day.

Day 3 is even cleaner: ₹12 of body on a ₹15 range gives 0.800. Day 5 is the mirror image, with sellers covering 62.5% of the range on the way down.

Now the 5-day average. For days 1 to 5, add the raw values: 0.714 − 0.417 + 0.800 − 0.500 − 0.625 ≈ −0.028. Divide by 5 and you get about −0.006. Basically zero. Price is up ₹2 over the five days, from a ₹500 open to a ₹502 close, and the indicator agrees that nobody really won the week.

Roll the window forward to days 2 to 6 and the average drops to about −0.248. The line has clearly moved into negative territory.

The day 6 problem

Look closely at day 6. The stock closed the previous day at ₹502 and finished day 6 at ₹524. That’s a gain of ₹22 on the day, about 4.4%. Most traders would call it a strong session. BOP scores it −0.500.

Why? Because the stock opened at ₹530, gapping up ₹28 over the previous close, and then drifted lower all day. BOP only sees the drift from ₹530 to ₹524. The gap itself is invisible to it, since the formula never looks at the previous close.

That isn’t a bug. It’s information. A stock that gaps up on news and then sells off through the session is telling you the opening euphoria found sellers waiting. But if you read the BOP line without checking the price chart, you’d think day 6 was a bad day for the stock. It wasn’t. It was a bad day for anyone who bought at the open.

How traders read the BOP line

ChartSchool describes three main uses, the same as for most oscillators.

Zero-line crossovers

When the smoothed line crosses above zero, it’s treated as a buy signal; a cross below zero is a sell signal. A longer averaging period cuts the number of false crossovers but also makes the line slower to react. ChartSchool is candid that plenty of crossovers lead nowhere, especially when price is moving sideways, and says chartists shouldn’t rely on the crossover alone but should look for volume and other indicators to confirm it.

Trends and divergences

A rising BOP line generally goes with an uptrend, and a falling one with a downtrend. The more interesting signal is a divergence. If price makes a new high but BOP doesn’t, that’s a negative divergence: the stock is still climbing, but each session’s buyers are winning by a smaller margin. If price makes a new low and BOP doesn’t, that’s a positive divergence. Either one can hint that the trend is running out of steam.

Overbought and oversold readings

There’s no universal overbought level for BOP. ChartSchool suggests looking at the long-term history of the stock you’re studying, noting how high and how low its smoothed BOP usually goes, and treating unusual extremes as possible overbought or oversold zones. A sleepy large-cap and a volatile small-cap will have very different normal ranges, so a level that’s extreme for one might be routine for the other.

Why the open matters so much for Indian stocks

Because BOP is anchored to the opening price, anything that distorts the open distorts the reading. In our market, results, block deals, global cues and overnight news often get priced in right at the open. Earnings season is the obvious example: a company reports after hours, and the next morning the stock opens far from the previous close.

On those days, BOP measures only what happened after the news was priced in. That’s useful if your question is “did the market agree with the gap?” It’s misleading if your question is “did the stock go up?” We’d suggest keeping a plain price chart or a close-to-close measure next to BOP, so the gap days stand out instead of quietly dragging your average around.

The same thinking applies to intraday charts. On a 5-minute chart each bar has its own open, so BOP becomes a measure of who won each 5-minute slice. That’s noisy, and you’ll probably want a longer smoothing period there.

When a stock gaps up and closes higher but BOP prints red, the indicator is telling you the opening buyers were the last ones happy that day.

BOP next to volume-based indicators

ChartSchool’s summary is that BOP measures buying and selling pressure from price alone rather than volume. That’s the main thing that separates it from tools like the Money Flow Index or the Accumulation/Distribution Line, which weight each bar by how many shares changed hands.

Ignoring volume keeps the indicator simple, and it means BOP can be calculated on any chart that has open, high, low and close prices. The downside is that a thinly traded session counts exactly as much as a heavy one. A stock that rallies from open to close on very low volume will look as strong on BOP as one that does it on huge volume. Pairing BOP with a volume tool covers that blind spot.

Practical settings and a few cautions

• Start with 14. That’s Levshin’s recommendation as reported by ChartSchool. Shorten it if you trade quick swings and can tolerate more noise; lengthen it for position trading.
• Watch the zero-range bar. If a bar’s high equals its low, as can happen on a stock frozen at a circuit limit or in a very illiquid counter, the formula divides by zero. Check how your platform handles it, and be sceptical of readings around such days.
• Check the gaps. Before acting on a sharp BOP move, look at whether the stock gapped. A gap-up followed by selling and a gap-down followed by buying will both push BOP against the day’s net price change.
• Don’t trade crossovers alone. In a sideways market the line crosses zero again and again. Use a trend filter, support and resistance, or a volume indicator for confirmation.
• Calibrate per stock. Set overbought and oversold zones from each stock’s own history rather than borrowing a number from someone else’s chart.

A simple way to use the balance of power indicator

If you want a starting routine, try this on a daily chart. First, decide the trend from price itself, with higher highs and higher lows or a moving average. Second, add BOP with a 14-period smoothing. In an uptrend, treat dips in BOP towards or slightly below zero as moments when sellers had a few good sessions, and look for the line to turn back up as a sign buyers are returning. Third, watch for a negative divergence near recent highs as an early warning to tighten stops, not as an automatic exit.

Throughout, keep one eye on the gap days. If the BOP line drops sharply on a day the stock actually closed higher, you now know why, and you can decide whether the selling after the open matters to your trade.

BOP is one small, honest tool. It tells you who won inside each bar, and nothing more. Used with price structure and volume, that narrow view can sharpen your read of a trend. Used alone, it will send you plenty of false signals. For more indicators and how they fit together, see our guide to technical analysis for Indian stocks.

Sources

• StockCharts ChartSchool: Balance of Power (BOP)

Disclaimer: This article is for education only and is not investment advice. The prices in the worked example are hypothetical. Technical indicators can give false signals; do your own research or consult a SEBI-registered adviser before trading.