TechniTrader Beginners How to Use TC2000 Balance of Power Indicator Properly

List of Tips To Get Started Using Balance of Power Indicator

TC2000 Users have a huge advantage over Traders who do not use this charting program. Unfortunately most TC2000 Users are not taking full advantage of tools embedded in this charting software program. One of the many tools that are unique to TC2000 is the Balance of Power Indicator. This indicator continues to evolve and change as the Market Structure changes, making it one of the most powerful indicators ever written.

Regardless of whether you use MACD, ADX, Bollinger Bands, RSI, or other popular indicators, adding Balance of Power to what you use will change how you interpret charts, analyze stocks, and select stocks to trade. The Balance of Power Indicator was designed for the modern automated markets. Watch a webinar about how to use this powerful leading indicator.

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Balance of Power is a leading indicator IF you learn to read it properly. Here is a list of tips to help you get started:

1. Just assuming red means distribution and green means accumulation, is an oversimplification of this sensitive and extremely powerful indicator. It is one of the longest formulas every written with 3.5 pages of algorithms. The Stock Market has splintered into 72 venues with some lit and some dark, and 9 Market Participant Groups. Therefore red versus green analysis is just the beginning. Traders need to know which Market Participant Group forms that particular red or green pattern.

2. The length of the indicator bars MATTERS. How long the bars are tells you which Market Participant Group is buying or selling, and that reveals important information in relation to how Price and Volume are behaving. As an example blasting long red Balance of Power bars in a Bottoming Formation is not giant Buy Side Institutions using Dark Pools, instead it is Smaller Funds using Volume Weighted Average Priced VWAP triggers.

3. Where in the Trend it turns green or red MATTERS. Different Market Participant Groups buy and sell at different locations in the Trend, based on their access to pertinent information. Some Market Participant Groups have access BEFORE the rest of the groups hear about it. So those groups are buying or selling ahead of the others.

4. To properly interpret this indicator you must use not only the Balance of Power indicator, but also Volume Bars and Price Patterns in combination. Using all three together is called Relational Analysis and the stock chart creates a viable picture that makes sense.

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The chart example below shows the Relational Analysis which gives the Balance of Power indicator logical and sensible interpretation, that Traders can use to enter a stock before huge gaps and runs.

TC2000 chart example of rounding bottom formation - technitrader

This chart has a rounding Bottom Formation, which is common for Dark Pool Quiet Accumulation. Bottoms of this kind take several months to complete, and can have gaps or sudden runs that provide excellent profits for Swing and Day Traders.

The Relational Analysis of Balance of Power, Volume Bars, and Price Patterns tell us early on what is happening, way ahead of the gap due to High Frequency Trading HFT filling the queues pre-market on the day of the gap. The Dark Pools are quietly accumulating while Smaller Funds who use VWAP trigger orders are still dumping the stock, unaware that they are selling into a Dark Pool Buy Zone™ price range.

What tells us this is a Dark Pool Buy Zone, is that the extremely long red bars of VWAP Smaller Funds selling does not drive Price down. Instead the indicator bars turn gray and are very short suddenly and intermittently, as Dark Pools go head to head against the VWAP orders and buy incrementally over time.

Volume spikes high above the Exponential Moving Average EMA only when HFTs trigger again, attempting to sell the stock down but failing to move it beyond the lows of the Buy Zone. Then as Smaller Funds selling evaporates, the Shift of Sentiment™ forms as indicated by the red and green arrows. This is a trader’s signal that a Momentum Run is imminent. HFTs gap the stock up on high Volume and high green Balance of Power bars. Smaller Funds chase them, as their VWAP orders always trigger after an HFT huge Volume spike.

Summary

Learning how to use the Balance of Power indicator properly is not hard but it requires an understanding of the relationship between the Indicator Patterns, Price Patterns, Volume Bars, Trend, and Market Conditions.

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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.

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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.