Identifying Market Balance Breakouts

http://is.gd/mbouts

A key aspect of any auction is whether a market is currently balanced or

imbalanced. Is it moving sideways and testing recent prices over and over

again or is it trending directionally and exploring new prices?

Whatever a market is doing, if it's identified swiftly a change in its

behavior from one type of phase to another can provide a potential

opportunity for a trader to make some money. Profiting from market balance breakouts is one side of this equation.

Think of the old trading adage "the trend is your friend". The implication

of this is that if you trade in the direction of the trend you are likely to

make money.

However, a stumbling block that traders often face is that they don't

address what a trend should look like. This means timeframe and market

structure.

The timeframe you are looking for particular structure in is crucial in the sense that you are ideally looking to profit from the intensity of activity of

participants trading in a higher timeframe than yourself.

In effect, you are trying to ride the directional wave of bigger players by

looking to time your entries on a higher timeframe, but still taking the

actual setups on your own timeframe.

So for example, you might look for a pullback in a trend on a daily chart as a condition to permit you to take a trade in that direction when a setup occurs

on a 15min chart.

The other aspect that traders often forget or struggle with is market

structure.

In terms of a trend, you can clearly see that in the last example of Canadian

Dollar Futures, it's pretty obvious that there's a strong downtrend.

But it's not always so simple and this is where traders go looking for

opportunities - unfortunately, this usually means they find structure and patterns that aren't particularly strong

and therefore are low probability.

The best balanced market structures are those that converge on price and

time. What I mean here by converging on price is that the balance tends to get tighter and tighter as the market

continues in the range and forms something akin to a triangle.

Admittedly, the way a market balances can vary quite a bit and won't always

be as easy to see as this example (although it can be easier too).

So to figure out whether a balance is good or not, it's also useful to identify any big market moving events that are

due (converging on time) and track volume participation at the extremes.

Markets tend to stay relatively balanced when there is highly

anticipated news due out as bigger players stay somewhat on the

sidelines, preferring to wait to commit their trading capital until after the

news is out of the way.

If a market is genuinely balanced, the volumes trading near extremes are likely to drop - this however is best

seen in the form of a volume profile rather than adding a simple volume

per bar indicator.

A market balance can do one of two things when it breaches a current

extreme price level - it can generate additional activity in that direction or

it can fail to follow through and reverse into previous prices.

Whether a market breaks or not tends to be a function of whether the things that make it a balance in the first place

remain constant.

Has the news that the market has been waiting for just been released? Has the balance had enough time to

develop and build up energy that needs to be released in the form of a

directional move? Has volume significantly increased at the

extremes?

An additional feature of some types of break is that strong directional volume (volume delta) starts to appear from the center of the balance area and continues strongly as an extreme is

taken out.

Once you have an idea of what a decent market balance should look like, it's really down to you to figure out how best to apply your current strategy in order to profit from the

opportunities that present themselves, be it Trend Jumper or any other

system.

A breakout can lead to a nice directional move that is at least going to be highly likely to be profitable on

your particular timeframe.

A failed breakout or an extension of the balance range could provide a great chance to take a trade with a view to the market taking back a significant portion of the range.

If you don't already do this, I urge you to start to try to identify market

balances and see just how successful your strategy can be when combined

with a market balance breakout.