Imbalance occurs when there is a significant excess of orders (buys or sells) in any given trading session.
As a result, this will affect the price of an asset.
Imbalances will often happen during rare events (news related), but they tend to get worked out quickly. In exceptional circumstances, these imbalances can last hours and even a whole day.
Where overall liquidity is at risk, preventative measures will often be put in place to mitigate further volatility. For example, suspended trading of an asset, or circuit breakers.
Imbalance occurs when there is a significant excess of orders (buys or sells) in any given trading session.
As a result, this will affect the price of an asset.
Imbalances will often happen during rare events (news related), but they tend to get worked out quickly. In exceptional circumstances, these imbalances can last hours and even a whole day.
Where overall liquidity is at risk, preventative measures will often be put in place to mitigate further volatility. For example, suspended trading of an asset, or circuit breakers.
On Foot Print Charts, imbalances can highlight bids and asks at specific price levels, where aggressive orders have taken place.
Using this to your advantage, you can put price action under greater scrutiny and anticipate the market reaction.
Look for significant imbalances to identify the beginning or end of a trend.
NOTE: During sessions of extreme imbalance, traders can use limit orders to protect themselves from extreme volatility. However, while you can set a specific price with a limit order, there is no guarantee of it being filled.
Key Points of the Lesson
UTILITY
Imbalances appear when volume traded at a certain price level is no longer balanced.
When a level is out of balance, there are proportionally more buyers or sellers at that level.
Check for imbalances at key support and resistance levels, to differentiate between continuation and a possible price reversal.
IMPLEMENTATION
Footprint software is needed, such as Exochart.
Set template settings between 400 and 618%.
The context in which imbalances appear and the following reactions can greatly enhance your trading strategy and win rate.
Absorption ⇒ limit orders opposite to the imbalances.
Swing Failure Patterns ⇒ swift price reversals.
Stacked imbalances ⇒ 3 or more on top of each other, showing momentum in the move.
BACKGROUND INFORMATION
The price of an asset will move up until:
New longs no longer want to open.
Longs are overwhelmed by shorts.
The price of an asset will move down until:
New shorts no longer want to open.
Shorts are overwhelmed by longs.
TIPS & TRICKS
Imbalances are not horizontal to each other ⇒ diagonal in steps.
The beginnings and ends of a trend are often marked by market imbalances caused by aggressive market participants.
Absorption and CVD divergences can indicate a possible trend reversal.
Upon breaking an important level, it is important to see imbalances with high volume in the direction of the move.
⇒ Heavy selling imbalances when losing a level.
⇒ Heavy buying imbalances when claiming a level.
If the market does not do what it is supposed to do at a key level, the contrary move is likely to be magnified. ⇒ observe market behaviour after imbalances occur.
ABSORPTION EXAMPLE
Price approaches the low of a range with heavy selling imbalances but unable to get any follow through. This highlights to us that passive orders are set, absorbing all the market selling and the market could not get through the limit orders so turned and then rallies in the other direction.
SPECIAL CASE SWING FAILURE PATTERN
Upon breaking/losing a level, imbalances opposite to the direction of the move appear ⇒ possible swift reversal.
Stacked imbalances in the wick with large volume, followed by a candle close below/above the reference level.
Price reversal continuation with strong opposite imbalances
Best traded when the reference level is taken with very high volume, but then retraces with aggressive selling/buying in the opposite direction ⇒ monitor open interest, volume and delta.
SFP EXAMPLE
A lot of selling imbalances when price drops and we take out the previous lows.
Will the price go lower ? Does it have trouble going lower?
Price quickly reverses and goes back above our reference level ⇒ limit orders absorbed all the sell orders.
We want to see buying imbalances to see continuation of this possible reversal.
TIPS & TRICKS
Check for:
Aggressive selling/buying at the key level, but price action not moving past it ⇒ absorption.
Trapped traders and market structure change.
Aggressive participants entering the market with an increase in volume upon reaching the key level.
⇒ No evidence ⇒ no trade!
TAKE HOME MESSAGE
Imbalances show overwhelming.
Check for absorption, SFP, stacked imbalances.
Wait for evidence before participating.