Types of Imbalances

Types of imbalances.

Questions

How many types of imbalances are there?

What are valleys and how can I locate them?

What are peaks and how can I locate them?

What is a continuation pattern, also known as a CP?

What should I do if a CP looks like a valley or a peak?

How many types of imbalances are there?

There are only two types.

1. Valleys and peaks (swing lows and swing highs).

2. Continuation patterns, also known as CP.
What are valleys and how can I locate them?

A valley is a V shape formation that is very common at the origin of a bullish impulsive move. A
valley is made of three features:

• Leg in or bearish move.

• A basing structure.
• Leg out or bullish move.
• Alternatively, the basing structure of a valley may be formed by non 50% candlesticks
and be made of only a bearish ERC and a bullish ERC (drop/rally).
What are peaks and how can I locate them?

A peak is an inverted V shape formation that is very common at the origin of a bearish impulsive
move. A peak is made of three features:

• Leg in or bullish move

• A basing structure
• Leg out or bearish move

Take a look at the chart below. We can see some peaks (Rally-Base-Drop) and (Rally-Drop). We
can see the leg up and the leg down printed lower highs and lower lows at [1] and [2]. This is
telling us that the bearish move is stronger than the bullish move. In further lessons, we will
learn what to do with these peaks and valleys and how trendlines can help us identify a trend
and new imbalances. For now, just bear in mind that these valleys and peaks together with price
action can tell us a lot about what the market is most likely going to do in the short term.
What is a continuation pattern, also known as a CP?

A continuation pattern or CP is a pause in the market before price resumes the underlying trend.
We can think of this pause as an accumulation of buy orders for longs or the distribution of sell
orders for shorts.

After a strong bullish impulsive move investors usually pause to "catch their breath" before
continuing their previous actions. Likewise, after a big drop in price, the price will usually stall for
a while with traders often closing existing short positions to take profits before continuing to sell
again. Because of those actions, price consolidates during these pauses and end up forming
certain patterns that we will learn to identify.

The formation of the CP is said to be complete after price breaks out and continues in the
direction of the underlying trend. These formations are often used by traders to make decisions.

See below a couple of examples. The first one at #1 is a bullish CP. Those at #2 and #3 are
bearish CPs.
What should I do if a CP looks like a valley or a peak?

There are times when price action can become very tricky to read. Don't worry about it, because
if you are struggling to read price action it will probably be for two reasons 1) You are not
experienced enough, 2) Price action is not clear.

Sometimes CPs will be difficult to locate and they might look like valleys or peaks (swings).
When you are in doubt, consider them as a CP.