Scoring imbalances

How to grade an imbalance to qualify it as a tradeable zone.

Questions

The importance of scoring imbalances

Qualifiers (parameters) used to score an imbalance

Consolidation away

The strength of the impulse

Freshness of a level

When is an imbalance considered as tested?

Determining the freshness of an imbalance

Basing stucture
Minimum reward/risk and profit margin

A bigger timeframe impulse that doesn't become an imbalance negates lower timeframe
imbalances

The importance of scoring imbalances

Success at trading supply and demand imbalances is mostly based on choosing very
strong and quality imbalances that follow a clear trending market. We expect traders to
sell at quality supply zones in a clear downtrend and buy at quality demand zones in a
clear uptrend.

There is much more to it than just the trend and the strength of the imbalance. No
matter how strong an imbalance may look, many of them will just not work. We need to
somehow come up with a mechanical and straightforward scoring system that clues us
in as to what makes a quality zone.

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Scoring the imbalances is very important. Everyone should stick to it to control our emotions
and all the noise that is being fed to us through various media channels. The scoring will prevent
us from having second thoughts or doubts about taking the next trade. If the particular trade
gets a passing score, it must be traded. It is for that reason that is called Set and forget.

See below the picture of a strong imbalance. We will use Snap Inc. #SNAP monthly
chart.

• New supply zones have been created at [1] and [2] at an all-time low after new
bearish strong impulses have consolidated away with at least one
full OCHL candle.
• Both supply levels have a very strong departure, that’s the kind of imbalances we
are looking to trade.
 • Price did not retrace to supply [1] by a few dollars, but it has retraced to supply
[2] after a few months of correction.

Qualifiers (parameters) used to score an imbalance

See below the list of qualifiers that we will use when scoring an imbalance. These
attributes will help us filter out the good imbalances from the bad ones. There are a few
basic qualifiers that we must consider when scoring an imbalance.
 1. Accomplishments. An impulse must accomplish something. Else it will not
become an imbalance. An accomplishment = trendline break or opposing
imbalance taken out.
2. Consolidation away. Consolidation away is a mandatory feature that we must
see in all imbalances.
3. Strength of the impulse. How fast or how slow price departs from a basing
structure. The stronger the impulse, the better.
4. Basing structure. Candlestick formation at the origin of an imbalance is critical.
5. Freshness. We only want to lean on fresh levels, that is, levels that have not been
tested in the past.

Consolidation away

Consolidation away is mandatory for an imbalance to be confirmed. It price fails to consolidate

away we will be in front of the picture of balance and not an imbalance. We want to see an
impulse strong enough to stay away from the potential base for at least one or more
full OCHL candles. These candles should, by no means, have tested the potential imbalance, it
must consolidate away and stay away from the base.
Let's look at an example of an impulse that did not consolidate away and another one that did
consolidate away. We will use Activision Blizzard #ATVI American stock. The bullish impulse at
#1 ws not strong enough to consolidate away. The impulse at #2 did consolidate away and is
confirmed as an imbalance.

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No consolidation away = no imbalance = no trade

The strength of the impulse

The move away from a level or impulse is the most essential feature and odds enhancer.

How did price leave the level?

• Strongest Impulse (gap). Think of it like a NASA rocket taking off, i.e. large ERC candles
or a gap away from the level. You can give a gap away an extra point if you like because
it is the biggest representation of an imbalance in supply and demand.
 • Strong Impulse. Think of it as a shot from a land-based world war cannon; those were
usually fired at an angle rather than space rockets that go vertical into the atmosphere.
This kind of departure is excellent, better if supported by an HTF imbalance.
• Weak Impulse. Think of it in terms of you pushing a car up a hill, that’s hard work!. The
candles leaving the zone are usually weak and a mixture of small bullish and bearish
candles, often 50% basing candles. Very low score = 0

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The impulse created after the basing structure has to be twice as wide as the basing structure
measured from the proximal line to the distal line. It also has to be made of at least two ERCs.
That is, a minimum 2:1 reward/risk.

Example of a strong impulse on CSX Corp #CSX daily chart

A gap is the strongest form of imbalance. A clear example can be seen on CSX Corp Stock daily
chart at [1]. A single candle at the base, the upper shadow can be used as a proximal line.

See below a second example of a very strong impulse on Pinterest #PINS on the monthly
demand level at #1.
See an example of a very week demand level on Apple Inc #AAPL weekly timeframe.
Freshness of a level

The freshness of a level is a crucial odds enhance in supply and demand. The more a level is
tested, the weaker it gets. If those retests do not accomplish anything, we should expect a
bigger penetration of the level which could end up being eliminated after a series of retests,
moreover if there is an HTF opposing imbalance in control.

• The first pullback is always the highest odds. We will only trade the first pullback
to an imbalance, that is, only fresh levels.
• The second pullback does not have the same odds. We want the highest odds for our
trades; thus, we will skip second pullbacks and wait for confirmation. Tested imbalances
require new imbalances to be traded.
• Taking a third pullback to a level is not allowed.
When is an imbalance considered as tested?

An imbalance will be considered an imbalance tested if the price retraces to its proximal line and
consolidates away with at least a full OHCL candle away from the original imbalance proximal
line.

Interactive Brokers #IBKR weekly chart example explains it in more detail.

Determining the freshness of an imbalance

The freshness of a level is essential to planning our trades and what to expect from an
imbalance. We've learnt already that we only want to trade off fresh levels since they provide the
highest odds. But when is a level considered to be tested or used-up? Every retest usually wears
a level out until it's finally broken, however depending on the bigger picture trend, a level could
be tested ten times and still hold various attacks.

There are different stages we will see when the price is approaching a fresh level:
 • The level is fresh.
• The level is being tested.
• The level is tested with full OHCL candle consolidating away from the level's proximal
line.
• The level is being tested a second time.
• The level is used-up or tested a second time with full OHCL candle consolidating away
from the level's proximal line.

Fresh level being tested

Tested level

Basing stucture

Scoring the structure at the base of a potential imbalance is crucial. The basing will tell us a lot
about what is going on before price creates the final impulse to become an imbalance. It would
help if you had experience and screen time to read price action. The basing structure will tell us
if the accumulation or distribution that happened in the area was caused or created by
professional investors. It takes time, a lot of time, to gain the experience to distinguish proper
basing from bad basing. You will not be able to identify a good structure from a bad structure
unless you spend countless hours in front of your trading platform analysing price action. There
are no shortcuts.
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Remember basing candles are pauses. If you see candlestick price action at a specific price area
and you don't see a clear pause with tight candlestick bodies, then it won't be a pause. If it's not
a pause, then it's not an imbalance.

Rules are very specific about the basing structure:

• We want to see a maximum of 4-6 candlesticks at the base—no matter which

timeframe.
• Tight candle bases with bodies <= 50% of the candle range. Remember a base is a
pause, a wide body or ERC candle is not a pause.
 • Strong impulse, the second leg out after the base (impulse) with ideally 2 ERC candles
closing at its high or near its high (about 80% of the whole candle range).

Example of a bad basing structure on #AWK

Basing structure is key to setting and forgetting trades and to plan new trades on the
confirmation. On #AWK weekly chart, I have drawn four areas to compare the basing structure.

• [1] has a lot of trading, more than six as per the rules. Not good to plan a trade on
nested levels
• [2] has a very similar structure to [1], too much trading. It was not respected
• [3] had a lot of trading at the base as well; it was respected for a couple of weeks and
then eliminated.
• These three zones have nothing to do if compared with the basing structure at [4], just
four tight candles accompanied by a very strong decline. That does not mean we can
short because the weekly trend is up; we must wait for confirmation. But if supply at [4]
starts playing out, price action at [1] is most likely going to be eliminated on the way
down.
See below an example of a bad basing structure on Gilead Sciences #GILD monthly timeframe.

Minimum reward/risk and profit margin

A minimum 2:1 imbalance and one full OHCL candle consolidating away from the level is
needed, as well as 3:1 profit margin or more to the opposing level.

If the imbalance has not accomplished a minimum 2:1 R/R, it will be considered as non-
tradeable and confirmation will be needed. Not having met the minimum 2:1 RR criteria does
not mean that it's not a valid imbalance. The imbalance will be valid but non-tradable
(confirmation needed), do not confuse these terms. The only compulsory factors necessary for
an imbalance are consolidation away, taking out opposing zone and/or breaking a trendline. A
2:1 RR is a minimum .requirement for tradeability. It does not negate the level as a valid
imbalance.

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Different trading plans can have different Reward Risk criteria, yours could require a minimum
3:1 RR, 2.5 or even 1.5:1. That does not change the fact that an x:x RR imbalance has eliminated
an opposing zone, an opposite zone can be eliminated by an imbalance that accomplished a 1:1,
2:1, 3:1 or higher RRs, we must decide which is the minimum RR we want to use to validate a
potential zone, else wait for confirmation
A bigger timeframe impulse that doesn't become an imbalance negates lower timeframe
imbalances

If any of the three timeframes in our sequence stops creating impulses that consolidate away or
the newly created imbalance doesn't score high, it will negate lower timeframe imbalances
nested at those HTF impulses that do not consolidate away. Remember that not all impulses
become correct imbalances, but all imbalances are made of impulses.

Let's have a look at an example using Nikkei 225 Index

• A bigger timeframe impulse doesn't consolidate away negates lower timeframe valid
imbalances.
• Monthly is in a clear uptrend. However, the last impulse at [1] was not strong enough to
consolidate away, thus, negating demand levels in timeframes lower than the monthly.
 One of those imbalances is weekly demand [3] responsible for eliminating strong weekly
demand at [4].
• Now the weekly chart created new supply zone at [4].