The Bounce Strength Indicator (BSI) is a powerful tool that helps traders gauge the strength of price bounces based on the Wyckoff method.
After a stock makes a move upward, it often enters a period of flat consolidation with a defined support level. As traders, it's crucial to keep a close eye on price action as it approaches this support. A surge in volume off of support—sometimes referred to as a springboard—can signal that a larger uptrend is about to kick off, and a breakout from the consolidation phase is on the horizon.
How to Measure the Strength of a Bounce?
To determine the strength of a bounce from lows, use the following formula:
(close - low) * (ceiling - low) / range spread
For measuring the strength of a bounce down from highs, the formula is:
(high - close) * (high - floor) / range spread
What My Measuring Method Indicates:
- The greater the bounce from a lower position, the stronger the buying pressure.
- The greater the drop from a higher position, the stronger the selling pressure.
This concept is straightforward, yet it can serve as a leading indicator for potential range breakouts. Keep in mind, it functions best within a defined range.
- Plus histogram — represents the bounce strength from lows;
- Minus histogram — represents the bounce strength from highs;
- Middle line — indicates the average of the differences between the plus/minus values.
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