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Imbalance Concepts

Imbalances in market prices arise when there is a great disparity between supply and demand, this can lead to inneficiencies where an asset does not trade at its fair value.

It is common for the price to rebalance after an imbalance, thus returning to the price area where the imbalance ocurred. These areas of imbalances can also be used as support and resistance areas.

The toolkit is able to detect imbalances from three methods:

  • Fair Value Gaps
  • Activity Asymmetry
  • Balance Price Range

Each method is covered in the section below.

Fair Value Gaps​

Fair Value Gaps (FVG)s highlight market imbalances from a sequence of three candles where the outer candle wicks fail to overlap the central candle body, the range between the wicks highlight a Fair Value Gap.

A bullish fair value gap is determined by the central candle being bullish, and a bearish fair value gap by the central candle being bearish.

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It is desirable for the central candle to be relatively volatile. Using the Auto FVG Threshold allows user to filter out Fair Value Gaps that occured with less volatile central candles.

Activity Asymmetry​

Activity Asymmetry is a type of imbalance ocurring during a significant disparity between market liqudity and volatility.

Unlike Fair Value Gaps, this imbalance concept requires volume information to be detected. These imbalances can more commonly occur near the extremas of a trend.

A bullish Activity Asymmetry is determined by the candle being bullish during the occurence of the imbalance, while a bearish activity asymmetry is determined by the candle being bearish during the occurence of the imbalance.

Balanced Price Range​

Balanced Price Ranges (BRP) occur when the areas of two Fair Value Gaps overlap. The overlapping areas highlight a new area of imbalance.

A bullish Balanced Price Range is determined by a new bullish Fair Value Gap area overlaping a previous bearish Fair Value Gap area, while a bearish Balanced Price Range is determined by a new bearish Fair Value Gap area overlapping a previous bullish Fair Value Gap area.

Mitigation Methods​

Once price breaks a highlighted imbalance area it is said to have been "mitigated" and will automatically disappear. Within the LuxAlgo Price Action Concepts indicator, users can determine the condition for any imbalance to be considered mitigated trough the Mitigation Method setting, available options include:

  • Close
  • Wick
  • Average
  • None

The Close option will remove a highlighted imbalance once price closes above it's top in the case of a bearish imbalance, and under its bottom in the case of a bullish imbalance.

The Wick option will remove a highlighted imbalance once price high reaches it's top in the case of a bearish imbalance, and when price low reaches it's bottom in case of a bullish imbalance.

The Average option will remove a highlighted imbalance once price crosses the average level of an imbalance.

The None option will not remove mitigated imbalances, thus returning all detected historical imbalances.

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This toolkit makes use of a buffer allowing for a maximum of 200 imbalances. Any newly detected imbalance making the buffer exceed this number will cause the toolkit to discard the oldest detected imbalance.

Alerts​

Users can be alerted on the detection of a bullish or bearish imbalance, as well as when an imbalance area is mitigated.