Market Profile : Balanced and Imbalanced Markets

In the last tutorial we discussed how to read a market profile charts and in this section we will cover different types of markets (Balanced Markets and Imbalanced Markets) and provide a fair idea who is in control for the day.

Balanced Market : It defines a range bound market(sideways) or a bracketed market [where price rotates within the bracketed range]. Balanced markets shows there is lack of conviction among the other timeframe buyers and sellers and typically results in a two way auction process and the price movements occur withing the range.

The above image shows a typical balanced profile (Bell Curve Shaped) where the price rotates within the price range [8609-8654] for the whole day. Volume plays an important role in Market Profile. When Prices move outside a balanced area, or trading range, without the presence of volume, it tends to return to the area. Generally the participation of the Longer Timeframe trader(Buyers and Sellers) are minimal and they dont have a strong influence in the market direction. The whole day is either controlled mostly by shorter timeframe traders or the locals (Day Trader). Such rotational days provides very minimal opportunities for a day trader.

Watch Live Market Profile Charts

Balanced profile days are typically slow and boring. Most of the trend trading strategies fails during these days and sometimes could yield consecutive losses in a stretch when the markets are highly compressed for more than 3 days. Identifying such days during the development of the profile are the key for a day timeframe players to set ‘what to expect from todays market’.

Balanced Market Occurs

1)Before any bigger economic events, news are expected (e.g RBI policy announcement, FED meeting ..etc)
2)Consolidation in the market after the uptrend or downtrend.
3)Low Participation from the Other timeframe players or Institutional players (Christmas & New Year holiday season)
4)Lack of liquidity(both buy side and sell side) in the market.

The result of this price rotational process is the discovery of prices that are acceptable to both the buyers and the sellers.

Imbalanced Market : It represents a trending market (uptrend or downtrend). Imbalanced market shows the conviction of other timeframe players. The auction is said to be one sided or directional where there are either more Buyers than Sellers or more Sellers than Buyers depending on the direction of price.

Imbalance of buyers will drive the prices higher till the buyers exhausted and the sellers takes control of the market. And the Imbalance of Sellers drives the market lower till the sellers get exhausted and the buyers takes control of the market.

The above picture shown the imbalanced profile. The days are typically elongated and vertical. And the range extension is typically one sided most of the days. Range extension confirms the presence of other timeframe players. Typically these days are fast and highly volatile and the risk reward ratio for the day trader is much higher on trendy days.

Imbalanced Market Occurs When
1)Major economic event days (RBI rate decision day, Election Results Day, GDP Announcements…etc)
2)Major catastrophic events.
3)Opening Gap Up or Gap Down days due to major positive or negative news impact.
4)Strong Global Markets Sentiment.

In the next session we will be discussing about different types of profile patterns and its significance.

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