There are many great trading strategies and types of methodology around the financial industry. Each and every one of them are based on the simple concept of supply and demand equilibrium. A trader using fibonacci ratios, moving average crossovers or over-bought/over-sold indicators may not use any form of zones, whereas a support and resistance trader may use many zones. However both of them are directly related to the direction that price will move next, while the direction itself is solely based on an imbalance between the buyers and sellers.
Locating each "imbalance" is a huge part of determining where the institutions and other large money have and will place their orders for up coming price movement. This gives an extensive probability factor for pre-determining market turns.
How do you determine where the supply and or demand imbalances are? While there is much more to trading, this alone can be most beneficial for adding major confluence to your current trading strategy.
Steps for locating out of balance areas:
- Look for a structure which controlled the direction of price.
- Locate the origin of the move away from this area.
- Look for an opposing direction to violate the high/low of the (1.) structure.
- Define the origin of the area which violated the structure and surround the pungency with a rectangle.
In the image you will find an example of the steps taken above to determine a high probability imbalance. Please click the image at the top for a much more detailed video recording.