Fair Value Gaps and Market Imbalances
What are Fair Value Gaps / Imbalances?
- Definition: An imbalance of market orders.
- More buy orders than sell orders or vice versa.
- Lack of orders in the opposite direction of market sentiment.
Identification of Imbalances
- Price Range: Imbalance occurs in a price range that lacks opposing orders.
- Example: A big price move up creates an imbalance with fewer sell orders in that price range.
- Same concept applies for a big price move down with fewer buy orders.
Why are Imbalances Beneficial?
- Revisiting Price Range: When price revisits the imbalanced range, it helps predict market direction.
- Example: Price moves up, forms an imbalance, returns to the price range, and exhibits buying power, suggesting a continued upward move.
- Market Sentiment: Supports the idea of price continuation in the same direction as the initial move.
Continuation Confluence
- Explanation: Imbalances act as a form of continuation confluence.
- They indicate where market wants to continue moving but are not essential for market movement.
- Order Blocks vs. Imbalances: Both are continuation confluences but differ from liquidity filling, which acts as a market magnet.
Practical Use
- Order Blocks Revisited: Similar to imbalances, if price revisits an order block and shows buying or selling power, it indicates continuation in that direction.
- Example Scenarios:
- Downside Order Block: Market moves up, revisits price range, and sells off, confirming the move down.
- Upside Order Block: Market moves down, revisits price range, and buys up, confirming the move up.
Key Concepts to Remember
- Fair Value Gaps: Imbalance of market orders in a price range.
- Market Sentiment: Directional move determines the type of imbalance.
- Price Movement: Revisiting imbalanced range with buying/selling power suggests continuation.
- Continuation Confluence: Fair value gaps and order blocks aid in predicting market direction.
Next Steps: Review identification methods and apply practical examples for better understanding.
Locked in, part one complete. Ready for the next session!