Point Of Balance Oscillator
The August issue of Technical Analysis of Stocks and Commodities has a detailed explanation of an indicator developed to assess the psychology of fear. As a matter of definition, they use the following terms:
Bull Fear - When Bulls are afraid they will miss out on a run, and Bears are trying to get out of it.
Bear Fear - When Bears are afraid they will miss out on a run, and Bulls are trying to get out of it.
Point of Balance - When Bulls and Bears are equal or undecided
The extreme of Bear Fear is an oversold condition, and the extreme of Bull Fear is an Overbought condition.
The magazine examples were charted using TradeStation by Omega Research, but if anyone is using MS Excel (in particular the Range Expansion Indicator for specific stocks) or can input custom formulas in their TA software, they can review the oscillator of themselves. Below is the mathematics for the POB Oscillator:
Bull Fear = BLF = ((HH[n] + HL[n] 2)
Bear Fear = BRF = ((HL[n] + LL[n])/2)
Point of Balance = POB = ((BLF-BRF)/2+BRF)
Where:
HH[n] = Highest High for the last [n] periods
HL[n] = Highest Low for the last [n] periods
LL[n] = Lowest Low for the last [n] periods
[n] =- the number of periods one is using (i.e., 5, 7, 14, etc. days)
When the Price bar crosses below the POB, one sells and/or shorts, and conversely when the Price bar (or line or candlestick) crosses above the POB one buys and/or buys to cover. On a more volatile stock, one would use a shorter [n] period, and a longer one for trending stocks. Although my initial assessment of it was that one would get better performance on less volatile stocks using simple trendlines.
If I get time in the next week I will put it into ProTA and post some graphics of sample charts to marketgems.com in a public area, probably the archives. If it appears worthwhile, I will generate an Excel spreadsheet that one can input High and Low prices and get the same answer. I will also put that on the website where one could download it. This, by the way, is not just an end-of-day tool. Knowing what the Point of Balance price is at close gives one a reasonable exit stop for the following day.
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