Changes to Market Structure Alter Balance of Power Interpretation - Candlestick Patterns Explained by TechniTrader®

Worden TC2000 Balance of Power the Most Powerful Indicator Ever Written

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 discussion is about the Worden Indicator Balance of Power (BOP). Many TC2000 Users give up on this indicator because they cannot figure it out. This is because of the changes to how large lots buy and sell stocks, the various Stock Market Participant Groups who use large lots, and the Stock 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.

In order to use Balance of Power properly, traders must also analyze the following:

WHERE in the Trend the Balance of Power is showing color or is neutral gray.
How long the bars are and the duration of that length over time.
The relationship between Price Patterns and Balance of Power.
Liquidity and shares traded.
The current Market Condition.

Here is an example of how to properly use the Worden Indicator Balance of Power. In the chart below, Balance of Power looks 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.

LEARN MORE at TechniTrader.Courses

Also, see that it is at a prior low and that Balance of Power had a lot of red bars that recently turned gray 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 (VWAP) orders trigger AFTER a High Frequency Trader (HFT) stock Volume spike. I have noted the stock Volume spike on the chart for you with a red arrow. HFT downside action with high stock Volume triggers automated Volume Weighted Average Price orders, which are overly popular with Small Funds Managers. They are accidentally SELLING against the giant-lot institutions who are buying.

Note also on this Weekly Chart View that stock 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.

LEARN MORE at TechniTrader.Courses

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

Look at the relationship between Price action after the HFT stock Volume and 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 VWAP orders sell into the Dark Pool Buy Zone™ of the giant institutions buying.

This slowly shortens BOP bars AND turns them gray. Always use gray bars, not yellow bars. Gray is neutral, while yellow means caution. You should not be reacting cautiously at this point.

The “Balance of Power”, which is what the BOP indicator is named after, suddenly stops the downtrend and begins the Bottoming Formation.

Now once you understand Balance of Power, 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 (TWAP) 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.

Balance of Power 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.

LEARN MORE at TechniTrader.Courses

If you have not yet begun to trade or invest, go to Introduction: Learn How to Trade Stocks – Free Video Lesson to get started.

Learn the steps to trade like a pro with this introductory mini course. You will learn what it takes to create a Professional Trading Plan that can help you achieve your trading goals: How to Create a Professional Trading Plan

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using TC2000 charts, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses