What is an IMBALANCE?

  • To begin, let me define what an imbalance is. It is an important concept to grasp in order to truly understand the nature of markets and why price moves.
  • Imbalance : An ILLIQUID area in price(an “imbalance in price) because all orders are on one side of the trade, either the BUY or SELL side.
  • When price is SIDEWAYS, you have LIQUIDITY meaning price is in agreement. You have an equilibrium between buyers and sellers.
  • Using candlestick analysis, you can identify imbalances in a price chart based on 3 basic structures. I will go into detail about these in a separate post.
This is one example of what an imbalance looks like. Price rallies from 3090 to 3158. After the initial impulse rally to 3150 area, price begins to base. All of a sudden, we get a massive flush. We get the impulsive move up, base, and DROP (I will identify these structures in a separate post). Price only moves for one reason, supply exceeds demand, demand exceeds supply, or we have sideways movement (agreement in price). This structure tells me that there is an excessive amount of sell orders placed due to the way price reacted when it sold off from 3158, down to 3070. Look what happens on the rally back into the newly created supply zone, you get immediate rejection (represents the sell orders hitting the market that did not fill on the initial drop because price fell too fast for the institutions to get the sell orders filled).
This is basic consolidation but to sum it up, this is an example of price IN BALANCE. There is agreement between buyers and sellers. Why is this important to know as a trader? We dont want to trade narrow range garbage chop. We want to look for imbalances in price as these give the break outs or break downs in the underlying due to the institutional orders waiting to be filled. RETAIL does not move the market, BIG MONEY (INSTITUTIONS) are what move the market. With the technical skill to identify imbalances, you can predict with high accuracy where these institutions have a surplus of buy or sell orders placed based on the behavior of candlesticks.