When a potential imbalance is confirmed as a zone?

When a potential imbalance is confirmed as a zone?

Before we begin this lesson I want to warn you that in this lesson you will come across topics and references that have not been taught yet and will only make sense to you if you have completed the lessons later in the course. Unfortunately it is not possible to teach each topic in full sequence.

You might remember from the introduction section, I have stated that you need to go through the lessons and the course several times to completely absorb the material, this is one of the reasons.

So if you have just started out please do not get confused and try to absorb the regular topics and do not focus on the terminologies as they could confuse you. Later on when you have finished the course in its entirety and you go for the second round, things will become very clear to you.

Finally – do not trade live until you have grasped everything even the marked sections in its entirety. You should demo/practice paper trading first before going for live trade. When trading on demo using what you have learnt so far, do not get disheartened when things do not work out, because the other sections are needed for the full picture!

Coming back to the today’s lesson, so far in the previous episodes we have only spoken about imbalances. An imbalance is merely a potential supply or demand zone. They sometimes might also be referred to as an unconfirmed supply or demand zone. The concept of differentiating between imbalances and valid supply/demand zone is unique in my methodology.

In this lesson you will learn how to confirm an imbalance as a valid supply or demand zone.

IMPORTANT UPDATE: I want to make the following statement absolutely clear to you. Having a confirmed imbalance does not necessarily mean that we can use it to plan a trade! In other words, under no circumstances should you place a trade just by the information you have received so far alone and basing your analysis on a single timeframe. In further episodes, you will start putting more pieces of the puzzle together, one of these missing pieces is the tradability of a level.

With that note, let’s discuss about HOW A POTENTIAL IMBALANCE IS CREATED

There are TWO SCENARIOS:

1.     A potential imbalance takes an opposing imbalances out  (and/or)

2.       A potential imbalance is created if price breaks a trendline with one or more full OCHL candles. This trendline must connect the latest 2 peaks/valleys or 3 or more consecutive CPs (Continuation Pattern)

Both scenarios can happen at the same time, which is why I am using the AND/OR Boolean statement in the rule above. As long as only one criteria is met the imbalance will be confirmed.

So, once you draw a zone based on rules the we have discussed so far in the previous episodes, you need to confirm validity of the zone using the 2 rules mentioned.

Example:

In this chart, we can draw a zone when this type of chart formation appears in chart, but the zone is vaild, only after price breaks the downward trendline plotted here and an OHLC candle closes forms above it. We need to remove the trendline and mark the zone as valid.

Supply and demand imbalances are made of impulses but not all impulses are imbalances. Even in this case, there are differences in the strength of the zone.

·         An imbalance that takes an opposing zone out is stronger than one that only breaks a trendline.

·         An imbalance that takes an opposing zone out and breaks a trendline is stronger than one that just broke a trendline

Imbalances can be differentiated in the following way:

·         Potential (Peak, Valley, CP): all of them are potential imbalances, nothing more nothing less, an area where you could draw potential areas of interest. This is nothing but identifying and drawing potential zones using valley’s, peaks and CPs.

·         Valid/Confirmed demand/supply zone: Imbalance that broke trendline or took an opposing zones out. This confirms the validity of the zone, which is what we discussed in this episode.

·         Tradaeble demand/supply zone: the imbalance will be tradable once it’s being scored, this includes multiple frame analysis and the core realignment rule

We have discussed about first 2 already items already.  3rd pointer, which is “Tradability of the zone” will be covered in future episodes.  We have already discussed about zone drawing rules and trendline drawing rules, so combine these 2 lessons with the rules I have mentioned in this episode and mark validity of the zones in your chart. Zones which are not marked as valid should be removed.

For more details and examples, checkout the video: