Worden Leading Indicator Balance of Power

Changes to Market Structure Alter Indicator Interpretation

TC2000 users have a huge advantage over other Retail Traders as they have the power of Worden Indicators at their disposal. However recent changes to the Market Structure have altered how Traders should interpret these indicators.This is because of the changes to how large lots buy and sell stocks, the various Market Participant Groups who use large lots, and the Order Types available to them.

One of the most common mistakes when using Balance of Power is to assume that long red bars represent distribution. This is a highly oversimplified analysis of one of the most powerful indicators ever written. Watch a webinar specifically for interpreting and using the Balance of Power indicator.
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To use Balance of Power properly Traders must also analyze the following:

1. Where in the trend is Balance of Power showing color or is it neutral gray
2. How long are the bars and the length of time they are a color
3. The relationship between price patterns and Balance of Power bars
4. Liquidity and shares traded
5. The current Market Condition

Here is a chart example with an explanation of how to properly use the Worden Indicator Balance of Power, which is in the bottom chart window. The indicator signal may look totally off track, but that is simply because you may not know how to read this indicator. Let me take you step by step, by first noticing the Trend. This stock has been in its own bearish Downtrend for a year now, and a Weekly Chart View shows the classic top.

weekly chart view shows the classic top - technitrader

Also see that it is at a prior low, and that Balance of Power had a lot of red bars that turned gray recently over the past couple of weeks. This is NOT distribution. This is the final capitulation selling by Smaller Funds who trade very similarly to the retail crowd, because they have a lack of technical education and their Volume Weighted Average Price orders trigger AFTER a High Frequency Trader Volume spike. 

I have noted the Volume spike on the chart for you with a red arrow. High Frequency Trader downside action with high Volume, triggers automated Volume Weighted Average Price orders which are overly popular with Small Funds Managers. They accidentally are SELLING, against the giant lot Institutions who are buying.

Note also on this Weekly Chart View, that Volume is LOWER during the capitulation period and rising as giant lot Institutions start buying in Dark Pools.

Now let’s look at the Daily Chart View for the same stock.

chart example with huge HFT order spike on volume turning into BOP RED and long - technitrader

It is easy to see the huge High Frequency Trading order spike on Volume, which also turns Balance of Power bars RED and long.

Look at the relationship between price action after the High Frequency Trader Volume. See how Balance of Power has a “Shift of Sentiment™” pattern as the Dark Pools quietly accumulate shares, as Smaller Funds are dumping. Giant lot orders are firing off as the Smaller Fund Volume Weighted Average Price orders, sell into the Dark Pool Buy Zone™ of the giant Institutions buying.

This slowly shortens the indicator bars, AND turns them gray. Always use gray bars not yellow bars as the neutral color for this indicator. Gray is commonly a neutral color, while yellow usually means caution. You should not be reacting cautiously at this point.

The “Balance of Power” which is what this indicator is named after, suddenly stops the downtrend and begins the Bottoming Formation. Watch a webinar on Trade Management Planning which includes determining personal share lot size, how many trades are needed to meet goals, number of stocks to trade, risk tolerance, and price range for tradng and investing.

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Once you understand how to read this indicator, it is easy to find excellent stocks to trade that will have sudden Momentum Runs out of a Bottom Formation action. Why does momentum occur after Dark Pools have been quietly accumulating? 

The answer is because giant Buy Side Institutions use Time Weighted Average Price orders to incrementally buy huge share lots of the stock. They are liquidity takers, not liquidity makers. So Professional Traders and High Frequency Traders can discover this liquidity decline, and react by trading the stock up suddenly causing momentum action that YOU can trade.

Summary

The Worden Indicator Balance of Power is one of the most powerful indicators available to Retail Traders. Usually this type of highly sophisticated indicator is only available to Professional Traders using proprietary trading platforms. It has changed over the years as the market has changed. Learning to read the new patterns is not difficult, but it is very important. Knowing where the Dark Pools are accumulating, can help Traders find excellent momentum stock picks BEFORE price begins to run.
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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
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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.