What Is Imbalance In The Forex Market?

An imbalance in the forex market can be defined as an imbalance between buyers and sellers. A bullish imbalance has more buyers behind it and a bearish imbalance has more sellers behind it.

Usually, when we see an impulsive move to the upside or downside in the market with no wicks overlapping full-bodied candles, this is where imbalances in the market are formed. 

How Do I Find Price Imbalance In The Forex Market’s Price Action

When looking for an imbalance in the market, simply look for any candle which has a full body and look for the part of the candle that isn’t overlapped by the previous and next candles’ wicks. This signifies an imbalance in the market because there were few transactions going on between buyers and sellers. In the case of the diagram above, we can see how sellers completely overpowered buyers. 

Wicks usually represent price oscillating up and down within the time it takes to print that candle, showing that price is efficient. So when you see a full-bodied candle with no wicks overlapping it, you’ve identified a clear imbalance in price.

Price Imbalance Is An Imbalance Between Buyers & Sellers

The reason we call it an imbalance is not only because it’s an imbalance between buyers and sellers, but because there is literally an imbalance in the market. 

If we have an impulsive move to the upside it’s because there are no sellers to absorb the buying pressure of the bulls (bid up). This means that there is no resistance from sellers to stop the buyers from pushing the price up extremely rapidly.

On the other hand, if we have an impulsive move to the downside it’s because there are no buyers to absorb the selling pressure of the bears (bid down). This means that there is no resistance from buyers to stop the sellers from pushing the price down extremely rapidly.

What Is The Difference Between Imbalance & Price Inefficiency

Imbalances in the market can also be viewed as inefficiency in price, telling us that potentially there may be banks or financial institutions involved in the aggressive movement of price we’re seeing. Again, if we think about it, most impulsive moves and imbalances in the market happen as a result of there being no liquidity in the form of orders to stop price from being met with resistance and slowing down.

In an efficient market, we typically see price trade in a range of fair value for that asset where sellers sell when they perceive the price of the asset is high (premium), and buyers buy when they perceive the price as low (discount).

How Imbalances Are High Momentum Moves In The Market

Imbalances in the market in most cases are caused by an institution manipulating prices in order to make a profit from a position they’ve accumulated at a particular level. They build their position, then take players that are against them out of the market (sweeping liquidity) in order to remove them from the equation and then push it in their intended direction.

By doing this, it creates a high momentum move and imbalance in the market that is much like a gap in price. In some cases, this price manipulation may be a part of an institution’s plan to generate liquidity, and therefore we may see price seek to “fill” that imbalance or close that gap before pushing back into the same direction that price impulsed from.

How To Use Market Imbalances In Your Forex Trading

Finding High Probability Zones and Points of Interest (POIs) To Trade From

Imbalances in the forex market are best used as a confluence for your trade setups and POI selection. When we see a clear imbalance in price, it’s safe to assume there is an institution manipulating price, or that we may potentially get a corrective pull-back at some point when price has become exhausted, and cannot continue to push in the same direction anymore

Looking for POIs (points of interest) with a clear price imbalance that forms after it, shows us that there is a clear inefficiency in price and within the market. This means that we can look at the zone where the imbalance originated from and consider it as a higher probability level to look to take a trade from. 

While not every zone with an imbalance will hold, this is a very powerful confluence that can be utilized to find good quality zones to analyze.

Finding Market Direction Using Market Imbalances In Forex

Naturally, most imbalances in the market represent inefficiency in price, and therefore there is usually a good chance that price will return to fill that imbalance (in order to make price efficient again). While this isn’t always the case (price can just continue to push away from imbalances that form in the market), we can sometimes see price seek to mitigate the imbalance, or the zone that the imbalance originated from, and therefore look to take a trade in the direction of the imbalance in order to profit off of price moving in that direction to mitigate it!

In Conclusion

Imbalances are just one of the many confluences we look for as smart money concept traders who are looking to find high-probability POIs in the market. As traders, we simply use this as one of the many tools in our toolbox to help us identify good quality zones, and we can even use imbalances to get a sense of market direction by identifying price inefficiencies (imbalances in the forex market) and taking trades in anticipation of those imbalances being filled. 

With that being said, we don’t rely on any one concept for our analysis, and what’s important is that we get a sense of overall market direction using forex market structure, forex liquidity concepts, and supply and demand zones before picking high-probability POIs and looking for an entry on the lower relative timeframes.

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Robert Castillo
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.