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Marketprofile + OI

Imbalance & Balance.

Today we are going to dive into an interesting discussion about the two major phases of market movement which are Imbalance(TREND) and Balance(Range bound movement).

Where does the market wants to move?

The market moves to a point where there is a balance from a point where there is imbalance in search of it’s true value and this is a continuous auction or negotiation process between buyers and sellers who have different perception of value.

The value is the price zone which the majority accept.

Here imbalance is something where one side of the tape is aggressive i.e. either the buyer or the seller. It’s popular name is “TREND”

When there’s an imbalance to one side the market will move in that direction of the imbalance(TREND) i.e. if there’s sellers imbalance the market will move down and vice versa.

When there’s no such imbalance market settles up in a range as it’s already in balance(Range bound).

How to identify an Imbalance?

From Market profile charts you can identify imbalances very easily either through Single prints or Range extensions. Whereas in contrast if you look at candlestick charts you might not be able to appreciate these because the candlestick charts doesn’t give much importance to time which is crucial to identify an imbalance as majority of the times imbalances are short lived as there’s a heavy competition for those prices because of the aggressive nature of participants on 1 side of the tape.

How to identify a balance?

The balance is usually absence of imbalance and that’s when you see no single prints or Range extensions or there’s no activity which can cause them. Some range extensions happen with lesser power and are to be taken as imbalances with lesser confidence and those have to be considered with caution in deciding to go all in with the direction of that imbalance.

How to know if the market will move further or consolidate after an imbalance?

Further move is nothing but a continuation of the imbalance and that also needs new imbalance in one side of the tape otherwise the market will like to shift to a balance.

So by now you should have got the idea that the differentiating factor between imbalance and balance is the volume or aggression from 1 side of the TAPE and that’s what we would like to see from OI data in terms of Fresh Big Buildups(Short/Long) to know if imbalance exists in the market? If it’s there then there will be a good move in the direction of that imbalance otherwise it will not be interested in moving due to lack of interest from the aggressive participation.

One last note is never challenge an imbalance until you see an equally opposing force in terms of buying for previous seller’s imbalance and selling for previous buyer’s imbalance. With this simple rule you can save a lot of your capital as by doing this you are going along the market and not the opposite to the wind. But to do that and not to lose capital differentiating between and identifying whether the market is in imbalance or balance is of utmost importance.

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