Market Imbalance and Balance – Supply & Demand Trading

In chart analysis, it is crucial to understand the balance and imbalance price action. These concepts help in identifying trading opportunities and making informed decisions.

This article explores understanding of Market balance and imbalance, and key characteristics and implication for traders.

Understanding Market Balance and Imbalance

Market either trends or moves sideways. This sideway movement is referred to as market in balanced state. On the other, the one-sided move (either up or down) is referred to as imbalance. This imbalance can be an uptrend or a downtrend. Traders often align their trade with the one-sided imbalance move.

Market does not move steadily in one direction. Market moves in phases. Normally, market moves from balance to imbalance and balance to imbalance. In case of uptrend, market moves in upward direction, then pauses its movement. This pause is the balanced state of market. This can be seen like this:

In case of downtrend, market moves in downward direction, then pause its movement. This pause is the balanced state of market in downtrend also known as Consolidation phase of market. This can be seen like this:

Market Balance in Trading

In financial market trading, market balance refers to a state where number of buyer and sellers are in equilibrium. This also means that forces of supply and demand are in harmony. This harmony among buyers and sellers provides stability in price and market moves sideways. Neither buyer nor sellers dominate the market.

Key Features of Balanced Market

The following the key features of balanced market:

• When supply equals demand, then price moves sideways. This sideway movement of price is also referred to as consolidation period. In institutional perspective, these consolidation periods are used by Smart Money for accumulation and distribution.
• There is a constant battle between buyers and sellers. In balanced market movement, buyers and sellers have comparable strength. This allows no market force to dominate the market and leads to no decisive movement in either direction.
• This phase of market is low volatile. This limited volatility results in smaller candlesticks bodies and smaller price swings. There are various way of measuring volatility. However, we can use indicator like Average True Range. In balanced market phase, ATR shows lower values.
• Consolidation phase occurs in different shapes. Rectangle shape is the most common and easily identified pattern. There are other patterns that are used to identify sideway market. These patterns include triangles, wedges and Wyckoff Schematics. These patterns are often seen before a breakout or breakdown.
• Apart from technical perspective, there are fundamental news and event that gives rise to sideway market. Consolidation phase indicates that market participants waiting for external factors like new and economic data. There are various definitions. One thing is universal that market participants wait for the breakout of the consolidation phase. This becomes the reason of fake breakout. Overall sentiment remains neutral in this phase.

Identification of Balanced Market on a Chart

It can be identified in the following way:

• Balanced market movement is a range bound movement. Price moves within well-defined support and resistance levels. It can be easy to draw horizontal support and resistance lines by connecting highs and lows of the range.
• Normally, traders use candlestick charts for technical analysis. In this phase of market, small-bodied candlesticks with overlapping wicks dominate the chart. Dojis and spinning tops are common because it signals indecision.
• As a technical analyst, traders can use technical indicators. Bollinger Bands contracts during balanced periods. This indicates reduced lack of volatility. Moving averages, during this period, flatten out and show lack of a clear trend.

Apart from all that trader can take further confirmations from volume. However, it is more technical than other aspects because of different definitions of volume analysis. Volume Spread Analysis is more reliable approach towards volume analysis.

Importance of Balanced Markets

As a trader, we want to trade with the overall flow of market. Trading with order flow allows participants to capture big price movements. Consolidation phase is a resting period where market rest and decides its next move. These consolidation phases often act as accumulation or distribution phases. Institutions use these zones to collect more and more orders.

Traders can trade the ranging markets by buying at support and selling at resistance. However, this is a limited approach towards trading the markets. Traders often wait for the right breakout or breakdown. This is because institutions collect as much orders as they can and make the market able to move one-sided. This ne-sided move is the trending phase where only one market force dominate the market (either buyers or sellers).

Market Imbalance in Trading

As we have said, market is a constant battle among buyers and sellers. When one of the market forces (either buyers or sellers) takes control of the battle, the market switch to an imbalanced state where the market moves in the direction of the stronger market force.

Market Imbalance is a significant disparity between supply (sellers) and demand (buyers). This leads to a sharp and directional price movements. If buyer dominate the market, market will move in upward direction. On the other hand, if sellers dominate, market will move downward.

Understanding market imbalance in trading is crucial for traders. It makes the trader able to identify areas on chart where price move aggressively. It can offer opportunities to enter and exit trades based on supply and demand dynamics.

Key Features of Market Imbalance

The following are the features of market imbalance:

• Either sellers or buyers dominate the market. There is no equilibrium takes place. When price breaks above the resistance, price rise due to buyers’ dominance and increased buying pressure. When price breaks below the support level, price drops down because of sellers’ dominance.
• There are strong impulsive price movements during these phases. Imbalanced state of market is characterized by large, directional candlesticks (bullish or bearish). These move often left minimal retracements and price movement is clearly seen as a trending movement.
• Price movement often leaves gaps which can be seen in the form of Fair Value Gaps. These gaps are liquidity gaps and indicate areas where orders were not fully matched.
• If imbalances are aligned with increased trading volume, it increases the validity of the trading setup.

Identification of Market Imbalance on Chart

It can be identified in the following way:

• Observe the formation of candlestick and candlestick patterns. Price action must be in the form of long candlesticks. It is crucial that these candlesticks have little to no wicks and signal strong buying or selling momentum.
• If you are following SMC and ICT concepts in trading, you must observe the FVGs. These are the gaps often mark zone of imbalance.
• Observe the participation of institutions by looking at volume spikes during imbalanced conditions. It denotes high participation of market participation. If there is low volume during the price gap, it indicates limited institutional participation.
• Spot the supply and demand zones. When price breaks out or down the consolidation phase, these are the most reactive area for price movement. Market often comes back and collect orders.

Importance of Market Imbalance for Traders

A sharp trader often trades high-probability trades. Imbalance areas provide clues about institutional activity. These are important zones because price often retraces to imbalance areas ton filled the unfilled orders. This gives pullback traders the opportunity to enter in the market. Imbalances signals strong trends and allows traders to align with the overall trend and market structure.

Final Note

Understanding market balance and imbalance is part of a trading journey and can never be neglected. This gives us the idea of range-trading opportunities and potential zones for trading. In balance state of market, our focus is on looking ofr range-bound trading. On the other hand, imbalance zones are focused on trend continuation and reversals which have the potential for higher returns. Remember, no single concept is enough for trading. It can be combined for better trading result.

Trading in financial markets have significant risk. It is not suitable for all investors. Past performance of price movement can be used as a guide for trading but does not guarantee future results. Conduct in-depth analysis and use proper risk management. Use stop loss and takes profits in your trades in order to stay disciplined in trading.

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