An imbalance in the forex market refers to the market condition when there is an imbalance between buyers and sellers, which means there are many orders of one kind: buy or sell. It implies that there are insufficient counterpoint orders.
How many types of imbalances are there?
There are only two types.
- Valleys and peaks (swing lows and swing highs)
- Continuation patterns, also known as CP
1- Valleys and peak
Valleys and Peaks are chart formations with a V shape (valleys) and an inverted V shape (peaks) that are generally reactions to earlier imbalances. The majority of the time, a swing retest will be a pullback to an imbalance level. They are the foundation of a trend.
Valleys and peaks are composed of these formations:
- Drop-Base-Rally or Drop-Rally
- Rally-Base-Drop or Rally-Drop
IMPORTANT: When you detect a valley, a peak, or a CP in a chart, you must recognize that the imbalance formation alone qualifies it as “potential demand” nothing more, nothing less.
This is critical to comprehend and should be kept in mind at all times during your training.
Read more: What is trade imbalance in forex?
What are valleys and how can I locate them?
A valley is a V-shaped formation that is commonly found at the start of a bullish impulsive move. A valley is made up of three distinct features:
- Leg in or bearish move.
- A basing structure.
- Leg out or bullish move.
Drop-Base-Rally
Alternatively, the valley’s base structure can be generated by non-50 percent candlesticks and consist of merely a bearish ERC and a bullish ERC (drop/rally). The “basing candle indicator” can be used to readily identify these candles.
What are peaks and how can I locate them?
A peak is an inverted V shape formation that is very common at the origin of a bearish impulsive move. A peak is made of three features:
- Leg in or bullish move
- A basing structure
- Leg out or bearish move
Examine the graph below. We can see some peaks Rally-Base-Drop and Rally-Drop. We can see the leg up and leg down printed lower highs and lower lows. This indicates that the negative move is stronger than the bullish motion. In subsequent lectures, we will learn what to do with these peaks and valleys, as well as how trendlines can help us detect a trend and new imbalances.
For the time being, keep in mind that these dips and peaks, combined with price movement, can tell us a lot about what the market is likely to do in the short run.
Rally-Base-Drop
2- Continuation pattern
A continuation pattern, as it is known in technical analysis, is a pattern that appears within a trend and generally indicates that the trend will continue. Unlike reversal patterns, continuation patterns indicate a momentary consolidation in the midst of a trend.
What is a continuation pattern, also known as a CP?
A continuation pattern (CP) is a market pause before the price restarts the underlying trend. This pause might be viewed as an accumulation of buy orders for longs or a dispersal of sell orders for shorts.
Investors typically pause to “gather their breath” after a large bullish impulsive move before continuing their prior actions. Similarly, after a significant price decline, the price will normally stall for a period, with traders frequently closing existing short positions to reap profits before continuing to sell. As a result of these acts, price consolidates during these pauses, producing particular patterns that we will learn to recognize.
After the price breaks out and continues in the direction of the underlying trend, the creation of the CP is deemed to be complete. Traders frequently use these formations to make judgments.
Very important: Locating and drawing CPs can be very tricky sometimes. There are as many variations as there are colors in the light spectrum.
A Continuation Pattern is composed of these formations
- Rally-Base-Rally
- Drop-Base-Drop
Some of its features:
- When trading with the trend or bouncing off of a larger timeframe, CPs are ideal.
- When the Trendline is broken on the TF it is located on, or when a larger period is in control, the odds are low.
- When the price has been running for a time and more than three successive Continuation Patterns have formed, the odds are low.
- High probabilities at the start of a trend change, during probable reversals, or after a Wow move that follows the overall trend and momentum.
What should I do if a CP looks like a valley or a peak?
There are times when price action can become very tricky to read. Don’t worry about it, because if you are struggling to read price action it will probably be for two reasons:
- You are not experienced enough
- Price action is not clear.
Sometimes CPs will be difficult to locate and they might look like valleys or peaks (swings). When you are in doubt, consider them as a CP.
