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T"Changes to Market Structure Alter TC2000 Balance of Power Indicator Interpretation" by Martha Stokes CMT
Changes to Market Structure Alter TC2000 Balance of Power Indicator Interpretation
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.
Today the discussion is 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 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.
To use Balance of Power properly, Traders must also analyze the following:
- WHERE in the Trend the BOP 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 BOP.
- Liquidity and shares traded.
- The current Market Condition.
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Here is an example of to properly use the Worden Indicator Balance of Power. In the chart below BOP 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.
Also see that it is at a prior low, and that BOP 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 VWAP orders trigger AFTER a High Frequency Trader HFT Volume spike. I have noted the Volume spike on the chart for you with a red arrow. HFT 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.
It is easy to see the huge High Frequency Trading order spike on Volume, which also turns BOP RED and long.
Look at the relationship between Price action after the HFT Volume, and how BOP 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 BOP, 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 HFTs can discover this liquidity decline and react by trading the stock up suddenly, causing momentum action that YOU can trade.
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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.
BOP 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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Martha Stokes CMTChartered Market TechnicianInstructor and Developer of TechniTrader Stock & Option Market Courses
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