Indicators: My Issues with BoP: Part #2In Part #1, we established how technical indicators - even the ones with high potential to be leading indicators that may enable revealing possible upcoming price movements, using the example of the Balance of Power (BoP), can come short of taking into consideration all factors associated with the price - we listed 7 specific issues that may cause BoP to show inaccuracies and a trader who depends on BoP for trading signals, need to either be aware of them, or adjust the indicator to address these issues.
so what's the idea here? why am I posting this?
the concepts i address here impact traders today. i see many fellow traders using MACD or RSI or other methods without the complete understanding of what exactly the signals are telling them - while i'm not a guru by any means, i thought i can share an example here of one of the highly potential concepts and a famous indicator, its shortcomings, and how it may be possible to tweak and adjust it to make it more reliable to the way each of us wants to trade. It becomes "your own system" - it interprets the movement the way *you want to visually interpret it* - and produces signals that you understand exactly what they means and you can rely on, to make a trade (entry / exit) decisions, score more winners, less losers -- it's a step into the "DIY" world of technical indicators if you would.
In this part, we pick one of the issues from part #1, and see how we can possibly fix it. and see what this "upgraded" BoP would look like.
i'll take the issue of "BoP not taking into consideration where the close of the bar is, compared to the full range of the bar"
as we know, if the bar closes near the high, this is a usually very bullish sign, and vice versa. the Shooting Star example (right-most bar in the chart) is an up bar, where close is > open - and as such, the classic BoP gives it a positive score. we all know how bearish a shooting star is - it's a scary pattern to the long trader - if BoP is accurate, it should result in some negative value for such a bar.
our update #1 adds a simple calculation - on top of the classic (Body / Range) BoP calculation. It also adds another score for where the bar closes compared to the High. if it closes exactly on the high, it gets a positive +100% and if it closes at the low, it gets a negative -100% -- then the scores are added together and averaged to produce a more accurate representation of the bar - that representation is closer to the way you, as a trader, would have in mind when you "visually" inspect the bar.
take a look now as you meet BoP II :) -- some of you would say "Aha!" - now the shooting star gets the negative BoP score it deserves :)
i further marked few note-worthy bars on the top chart where the score of the upgraded BoP formula, with this simple technique, is considerably (in my view) different than the classic BoP score - check for yourself if the BoP II score makes more sense to you, and is closer to your "visual" assessment of how bearish / bullish a bar looks to you.
on the lower BoP indicator, you can see the difference in action, between the old and the new calculation - also marked areas where old BoP would have shown strength where is should show weakness, or the other way around.
in conclusion, i suspect some may be wondering -- 'OK, if we fix all issues with BoP - add volume & spread impacts and factor in the "context" of where the bar is within a trend - do we get the "holy grail" indicator of all times?
we'll see -maybe in future parts - please let me know if you find this research interesting of if you have comments.
