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.
Time Stamps
1:07 – BAT/BTC Previous COTW (DO NOT TRADE THIS)
- CC on the monthly level is a trade Daniel would take every single time
6:17 – IMBALANCES
- The price of the chart will move up or down until these criteria are met.
- Price goes up until
- New longs no longer want to open
- Longs are overwhelmed by shorts
- Price goes down
- New shorts no longer want to open
- Shorts are overwhelmed by longs
- Volume traded at the price level in the market can either be balanced or imbalanced. When a level is out of balance there are proportionally more buyers or sellers at that level. Daniel likes to use 400-618% to highlight imbalances.
- The beginnings of a trend, as well as the end of the trend, are often marked with market imbalances caused by aggressive participants
- Imbalances are not horizontal to each other but in steps (diagonal)
- A stacked imbalance is 3 or more on top of one another
- When we see a stacking on imbalances we should watch what the market does afterwards. Does the market rally? Does the market sell-off? Does it hesitate? Does it get absorbed? When there are big aggressive buyers the market will typically rally. When there are big aggressive sellers the market will typically sell-off. If the market does not do what it is supposed to do, the contrary move is likely to be magnified.
- For example, if there are lots of big aggressive shorts and price is not moving down than it shows that the limit order is absorbing all the sells and a move upwards will likely be strong.
- Stacked imbalances can offer support and resistance levels (Daniel does not trade off this theory so much though).
15:45 – IMBALANCES WHEN BREAKING A LEVEL
- Daniel likes to trade looking at imbalances primarily when markets are grinding upwards and when price is breaking a level.
- On breaking up you want to see a lot of buying imbalances and when breaking down you want to see a lot of selling imbalances.
- It is always needed to see this if you want to trade the breakout or if you see this don’t look to fade
- What you would not want to have seen is that upon taking the low get a lot of buying imbalances. That signals that instead of continuation downwards price is likely to get the SFP.
20:42 – IMBALANCES – ABSORPTION
- 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.
- Daniel likes to see the evidence of passive buying at the lows (by form of aggressive selling and price not breaking down) and then imbalances as the market pushes up from the low.
24:20 – IMBALANCES – ABSORPTION AT THE HIGH (EXAMPLE)
- Price is heavily being bought but is not able to go higher – is not doing what is expected – it is very likely it will go in opposite direction strong. Confirmation is upon breaking the low (and quick sell off).
26:44 – IMBALANCES AT THE HIGH/LOW
- A bearish setup: when there is a very high volume at the wick and then closes lower it is a bearish sign and possible trapped longs. This is best seen when the high of the wick has extremely high volume like a blow off top (extremely high volume in the wick).
- Basically, we want to see stacked imbalances in the wick with large volume and of course the candle to close lower than the imbalances. Part two would then be to see selling imbalances to show the market is trying to aggressively sell off.
- SFP is best traded when you see the reference level taken is very high volume but then retraces below the open with very aggressive selling/buying in the opposite direction. Also keep an eye on volume and OI.
- Daniel loves to look for imbalances at the big reference levels such as CC, Weekly, Monthly levels. If there is an evidence market is trying to either:
- Aggressively selling these levels and market is not moving down
- Trapped traders and MS change
- Price gets to level and immediately shows aggressive participants showing up with big volume
- It is better to have an alert and wait for the evidence that the market wants to trade at this level rather than just hoping.
- Daniel’s favourite setups
- Price slowly grinds down with shorts getting aggressive at each low
- Price reaches a key level on the chart, many times a high liquidity area
- Price wicks through the level with aggressive shorts, which is immediately bought up with stacked buying imbalances
- Price breaks market structure locally and the short squeeze starts
- On a slow bleed day, he would only consider a long after seeing buying imbalances.
41:05 – EXAMPLES
49:15– Q&A
- If you see a lot of buying imbalances but OI is falling it is likely people closing out of their positions rather than longs opening.
- If you see a lot of selling imbalances but OI is falling it is likely people closing out of their positions rather than shorts opening.
- If there are for instance buying imbalances but is not the level Daniel is watching he will not trade that.
- You have to put your stop loss at the invalidation (either the low of the wick or two higher lows back etc.)