Using Trade Imbalances for Better Trading

Trade imbalances can serve as potential profit opportunities and show positions with an especially high amount of risk.

Order imbalances exist when orders to buy or sell a security far outweigh the current supply. These situations usually last for just a few moments because the announcement fuels a wave of liquidity and the market maker can use reserved shares to resume normalcy. In the most extreme cases, trading can be halted until the imbalance is resolved.

2 Types Of Imbalances

  • The two types of imbalances are buy order imbalances (buy orders exceed sell orders) and sell order imbalances (sell orders exceed buy orders).
  • Imbalance information is issued two minutes before the market opens and 10 minutes before it closes.

Before The Information is Released

  • The first consideration regarding trade imbalances comes before the information is released. Shares often react to imbalance information as algorithms and traders try to buy or sell into the liquidity opportunity and predict the closing price.
  • Traders who do not want to risk a price change on the release of this information should exit or hedge their positions before 9:28 am and 3:50 pm (when the information is released). On the contrary, if traders have some reason to believe the imbalance will be one way or another (ie. tape reading, sentiment) entering positions before the imbalance release can prove lucrative.

After The Release

  • As the information is released, shares are volatile as traders jockey for positions to sell liquidity to the big funds. Note the example below.
  • If Nasdaq reports a large buy imbalance on a security, that means a fund or several investors are trying to take a position in the security before the market closes. This large purchase puts upward pressure on the stock, meaning entering a position on the data can be profitable.

However, this profit taking is far from easy. Dennis Dick of Bright Trading explains, “In this HFT world, many algorithmic systems will manipulate these closing imbalances, and sometimes in the last minute or two they will flip, causing a sell imbalance to go to a buy imbalance. If that happens it catches many imbalance traders by surprise. Sometimes these imbalance plays get crowded as well. And if too many imbalance players are on the same side of the trade, the imbalance could also flip.”

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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