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Understanding Market Inefficiency/ Imbalance in Cryptocurrency and Forex Trading.
A lot of people in the cryptocurrency and forex trading industry have a lack of understanding or are at the least confused to some extent by the idea of inefficiency or imbalance in the market.
Well for price action to be considered efficient, both buyers and sellers must have a fair chance at access to liquidity within a price movement. So basically for every buy order there needs to be a sell order on the other end and for every sell order there needs to be a buy order on the other end.
To make it a little more understandable we will consider price movement in a 3 candle series. For price action to be classified as efficient, when price is moving up, the high of the first candle needs to meet the low of the third candle. When it is moving down, the low of the first candle has to meet the high of the third candle.
So when the first and third candles do not meet, that part of the second candle that forms the gap between the high of the first candle and the low of the third candle in an upward movement or the low of the first candle and the high of the third candle in a downward movement is what is considered as inefficiency/imbalance in the market.
Whenever this inefficiency forms in the market, price will come back to that area at some point in the future to fill that gap. Some inefficiencies may get filled up after days, weeks or even months. So it might not get filled instantaneously but it will most certainly get filled. As I am writing this article (15/02/2022) Bitcoin currently has inefficiency that formed on the monthly chart within the December candle which is yet to be filled. So we know for a fact that at some point in the future the Bitcoin value will be higher than its current value because it has to go back up and fill that inefficiency.
I know what's going on in your mind right now, "I'm about to make billions trading inefficiency", right? 😉... Well market inefficiency/imbalance is not safe to trade on its own. It is however a useful tool to incorporate within your strategy as it helps you determine or predict future market behavior. So when used along with something else, like order blocks, it helps you weed out bad trades and lets you focus on those high probability trades.
So go on and use this piece of knowledge in your trading or investing and see how it goes!
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