Bullish Percent Index Trading Strategy (BPI)

Bullish percent index

The Bullish Percent Index (BPI) is a tool used by investors to gauge market sentiment and potential shifts in market trends.

In this article, we’ll look at what it is, how you can calculate BPI, find out if you can backtest it, and if it works.  

This technical indicator, part of the Point & Figure charting technique, presumably offers a perspective on the strength or weakness within a specific index or sector.

What is the Bullish Percent Index (BPI), and how is it calculated?

The Bullish Percent Index (BPI) is a technical analysis indicator that measures the breadth of the stock market. It is shown as the percentage of stocks on a Point & Figure chart that is signaling a buy signal within an index.

It is considered a breadth indicator, which means that it helps to assess the overall strength or weakness of the market.

Perhaps the most famous breadth indicator is the Zweig Breadth Thrust Indicator.

Calculating the BPI

The BPI is calculated by dividing the number of stocks on the Point & Figure chart that shows buy signals by the total number of stocks included in the index.

The result is expressed as a percentage. For example, a BPI of 70% means that 70% of the stocks in the index are on a Point & Figure Buy Signal.

An example of a Point & Figure chart is shown below, calculated in Amibroker: 

Bullish Percent Index Trading Strategy
Bullish Percent Index Trading Strategy

Interpreting the BPI

In its most basic form, the BPI is considered bullish when it is above 50% and bearish when it is below 50%. This means that when more than half of the stocks in the index are on a Point & Figure Buy Signal, the bulls have the upper hand, and vice versa.

However, the BPI can also be used to identify overbought and oversold conditions. A BPI of above 70% is considered overbought, which means that the market may be due for a correction.

Conversely, a BPI of below 30% is considered oversold, which means that the market may be ripe for a rally.

That said, if this works in practice remains to be seen. You need to backtest to find out. Unfortunately, this is easier than done because it requires a lot of code, something which is out of reach for this article. 

Using the BPI in Trading

The BPI can be used in a variety of trading strategies. Some traders use it to identify potential entry and exit points, while others use it to confirm their overall market outlook.

The BPI can also be used to develop trading signals, such as buying when the BPI crosses above 50% and selling when it crosses below 50%.

Backtesting the BPI

Before using the BPI in your trading, it is important to backtest it to see how it has performed in the past. This will help you to identify any potential weaknesses in the indicator and to determine whether it is a reliable tool for your trading style.

But as indicated further up in the article, it’s very difficult to backtest the BPI.

Bullish Percent Index Trading Strategy  (Backtest)

Can we make a Bullish Percent Index trading strategy?

Of course, we can, but we are quantified and automated traders, and the BPI is not the easiest indicator to backtest. 

We have yet to see a backtest, so we assume it’s not done. It’s all based on anecdotal evidence!

What are the limitations of the bullish percent index (BPI)?

Reactionary Nature: The BPI is a lagging indicator, meaning that it reflects the overall market sentiment after it has already occurred. This means that it can provide valuable insights into past market movements, but it might not be as effective at predicting future trends.

Sensitivity to Index Composition: The BPI is calculated based on the stocks that make up the underlying index. Any changes to the index composition can significantly impact the BPI’s value. For instance, if a large number of stocks with bullish P&F patterns are added to the index, the BPI will rise, even if the overall market sentiment is bearish.

Limited Ability to Capture Individual Stock Movements: The BPI is a broad-based indicator that measures the overall bullish sentiment across an entire market index. It does not provide insights into the individual movements of individual stocks. 

Overreliance on P&F Charts: The BPI relies heavily on the accuracy of P&F charts, which can be subjective and prone to errors in interpretation. This can make the BPI less reliable as an indicator. It’s a technical tool, and technical traders are not particularly interested in automating trading strategies. 

Backtesting and Thorough Testing: Due to its limitations, it is essential to backtest the BPI extensively before using it to make trading decisions. Backtesting involves using historical data to evaluate the indicator’s effectiveness in predicting future price movements. But it’s almost impossible to backtest it, so we leave that to others. 

What are the risks involved in using the bullish percent index (BPI)?

The Bullish Percent Index (BPI) is a market breadth indicator used in technical analysis to determine the percentage of stocks with bullish patterns.

While it can be a valuable tool, there are several risks and limitations associated with its use:

  1. False Signals: Like any technical indicator, the BPI can give false signals. A high or low reading on the BPI does not guarantee market movement in the expected direction. Trading is all about finding a positive edge where you’ll make money in the long run. 
  2. Lagging Nature: The BPI may not predict market tops and bottoms accurately as it’s a lagging indicator. It often confirms trends that have already begun.
  3. Overemphasis on Technical Analysis: Relying solely on BPI can lead to ignoring fundamental factors affecting the market, which can be risky, especially in volatile market conditions.
  4. Limited Scope: The BPI typically tracks a specific index or sector. It doesn’t provide a comprehensive view of the market if used in isolation.
  5. Market Noise: Short-term fluctuations in the BPI can be misleading, leading to overtrading or incorrect interpretations of market trends.
  6. Requires Contextual Understanding: The BPI should be used in conjunction with other indicators and market analysis tools. Without a holistic approach, it might lead to misguided trading decisions.
  7. Backtesting Limitations: While backtesting is crucial, it also has limitations. Past performance is not always indicative of future results, especially in a changing market environment. It’s practically impossible to backtest the indicator.
  8. Subject to Interpretation: The interpretation of BPI signals can be subjective. Different traders might draw different conclusions from the same data.
  9. Not Foolproof in Extreme Conditions: In extreme market conditions, such as a financial crisis or a rapid bull market, the BPI might not be as effective.
  10. Technical Skill Required: Proper use of the BPI requires a certain level of technical analysis skill and experience, which might not be suitable for all investors.

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