Part 1. Imbalance and balance between supply and demandPrice is not the product of news. The purpose of the market is to facilitate trading. There are two main forces that we already know: supply and demand.
Imbalance and Balance:
The balance between supply and demand creates the opportunity for traders. This process is fractal or repetitive and has predictive value. Price flows from balance to imbalance and vice versa.
Look at the basic structure:
Two basic terms for beginners:
A. Supply exceeds demand: sellers think that this price is too high to go above, and enter the position. There are fewer buying orders than selling orders.
B. Demand exceeds supply: buyers think that this price is too low to go below, and enter the position. There are fewer buying orders than selling orders.
How does the price move up?
Reason: Demand > Supply
1. Buyers are stronger than sellers.
2. Long-term buyers (institutions) enter the market with large buying volume.
3. Buying orders become higher than selling orders.
4. Sellers are not interested in selling at the current price.
5. Buyers start accepting higher prices to get their orders filled.
6. Sellers enter, increasing supply and slowing the price movement.
How does the price move down?
Reason: Supply > Demand
1. Sellers are stronger than buyers.
2. Long-term sellers (institutions) enter the market with large selling volume.
3. Selling orders become higher than buying orders.
4. Buyers are not interested in buying at the current price.
5. Sellers start accepting lower prices to get their orders filled.
6. Buyers enter, increasing demand and slowing the price movement.
How does the price move sideways?
Reason: Supply = Demand
1. Buyers and sellers have equal strength.
2. Buying and selling orders are almost balanced.
3. Neither buyers nor sellers can push the price strongly.
4. Long-term traders accept the current price as fair value.
5. Price starts moving within a fixed range.
6. The market consolidates until a new imbalance appears.
Trading Application:
As traders, our job is to understand what is happening in the market. We look for areas where buyers and sellers were balanced and where the imbalance started. By studying price movement, we try to understand who is stronger and follow the footprints of large traders. This helps us find better trading opportunities.
Fair Value Area:
Fair Value Area is a zone where buyers and sellers agree that the current price is fair. In this area, supply and demand become balanced, so neither buyers nor sellers can strongly move the price. Price usually moves sideways, creating a consolidation range. Large traders use this area to buy or sell depending on market conditions. When supply or demand becomes stronger, price leaves the fair value area and moves toward a new level.
The chart above shows structural information about the fair value area.
Stage 1: Price moves up after demand exceeds supply due to an imbalance. Sellers stay away as CMP is away from the fair value of the price.
Stage 2: Sellers enter after getting a convenient value. Supply enters the chat. Both forces are equal, and buyers and sellers agree with the price movement.
Stage 3: Buyers give up as they feel the current market price is not for them. Sellers find a reasonable price to sell. Supply exceeds demand.
Stage 4: A new balance will be formed soon.
Real-time example:
Buying below the lower band! Safe traders should buy after the price re-enters the channel.
Selling above the higher band! Safe traders should sell after the price re-enters the channel.
This approach provides small stop-loss and high target potential. A breakout or breakdown will provide a last pullback or throwback, called the last kiss in naked forex terms.
This is just one component of market mechanics, market profile, and price action. There is a lot to explain in this structure.
It takes a lot of time to prepare this type of handmade educational post. I will be happy if it provides value to your personal trading and growth. I will be back with the next part soon.
By @BrightRally_Research on the TradingView platform
Education
