Trading Imbalance – What is it? How to Find & Trade it?

Trading concepts

Trading imbalances

Trading imbalance is a crucial concept in trading that refers to inequality between buying and selling orders. In other words, trading imbalances happen when the market receives too many buying or selling orders and very few counterpart orders. 

Do you want to learn more about trading imbalances? Then you need to keep reading this article. Given the importance of this crucial concept, we decided to help our readers understand it in the most simple words. In this article, we are going to explore what a trading imbalance is, how to find it, and how to trade it. So, grab a cup of coffee for yourself and keep reading as you have plenty to learn today!

What is the trading imbalance?

Trading imbalance, also known as an order imbalance, means the absence of balance between buying and selling orders. Excessive buying or selling of a particular financial instrument on an exchange causes this specific scenario. As a result of this imbalanced situation, buyers or sellers find it extremely difficult to get their orders matched. This situation occurs because there is one kind of order of an instrument that cannot be matched. Therefore, traders find it near impossible to complete their transactions.

Trading Imbalance explained

As you know, buyers need sell orders to complete their trades and vice versa. For example, if you want to buy an asset, you need a sell order placed on your exchange. However, trading imbalance causes an imbalance in the equation. Too much order of one kind slant the buy order, sell order equation. 

So, this is an order imbalance or trade imbalance. Now, the next point to understand is why order imbalance occurs. There are different reasons. For example, the good news about a company increases demand. But at the same time, it also makes these stocks attractive to hold. As a result, there will be more buyers than sellers. 

Conversely, bad news about a company significantly increases the number of sellers. However, buyers will also be low because nobody prefers to buy shares of such a company. As a result, buyers will be substantially low as compared to sellers. 

Moreover, Federal Reserve decisions may also cause trade imbalances. For example, hawkish policies may push investors into a worrying situation. As a result, supply and demand may be significantly affected. That leads to trading imbalances. 

Now, let’s move on to another pertinent question. What happens after an imbalance in trading?

What happens if there is an imbalance in orders?

It is a very apt question and you need to know the answer to that. So, what happens when an imbalance in orders arises? There are different scenarios here.

  • When trading has already started the day – When trading has already started for the day, stock exchanges temporarily stop trading particular stocks. 
  • In case of order imbalance occurring prior to the opening, stock exchanges may delay trading. 

In such cases, exchanges may bring stocks in from a specified reserve to increase liquidity. So, new liquidity clears out excess orders and thus trading gets on its way in a smooth orderly manner. 

For how long does order imbalance last? 

As you know, there are several scenarios that may cause a trading imbalance. This imbalance in trading may last for a few minutes to several trading sessions. For example, an imbalance in the trading of bigger companies with high liquidity may last for a few minutes or hours. It gets sorted out because there is high liquidity. 

Conversely, trading imbalances of small companies with less liquidity may last for a long. Why so? Because there is low liquidity. That means there are fewer investors and fewer shares that make it difficult to sort things out. 

How do you get order imbalance data? 

It is of paramount importance to study order imbalances. It is important because it empowers you to assess where whales are accumulating positions. But the question is “how to get data on order imbalance?”

Imbalance data was very difficult to acquire not very long ago. Investors had to rely on prop firms to access direct feed. However, this isn’t the case anymore. Time has changed and of course, things are a bit different now. Nowadays, there are various data vendors that provide you with data feed at very reasonable prices. 

For example, websites like Market Chameleon, Investing, Webull, etc. can help you get imbalanced data. You can also acquire data through NASDAQ TotalView. It is NASDAQ’s data feed for investors. Additionally, it is a level 3 data feed and offers more value than typical level 2 data. However, it is a very expensive option. 

Fortunately, there are several data brokers that also offer trade imbalance data. They are licensed and NASDAQ provides a list of the brokers that can provide you data feed. The following are a few of those licensed data brokers;

  • Sterling Trading Tech
  • Bloomberg Finance L.P.
  • NASDAQ Workstation
  • Charles Schwab

How to trade trading imbalance? 

Now, it’s time to understand how to trade trading imbalances. As you know, there are a variety of factors that may affect financial markets. Therefore, it is important to stay updated and vigilant to earn profits. 

1. Day trading order imbalance

If you are thinking about day trading imbalances, it isn’t a good strategy. In fact, it isn’t feasible. Let me tell you why. Trading imbalances is a game of statistics. The more quickly you get data, the more efficient you are. That means, in this game of speed, you may fall short of automated traders. Investors having access to the fastest data and execution will easily win. 

Let’s try to understand it through an example. Before the advent of advanced electronic markets, prop traders had great speed advantages. So, they used to take advantage of inefficient limit orders and successful scalp imbalances. However, this isn’t the case anymore because electronic markets are very efficient now. Everyone has access to data feeds. In such a situation, only the best firms can scalp imbalances because they have the fastest data feeds.

2. Swing trading

As compared to day trading, swing trading imbalances are a good strategy. In fact, trading imbalances over the long run help us to find where the smart money is heading. For example, when we observe imbalances over the long run, we can conclude that someone is building a position. Furthermore, smart investors may take weeks, even months to build a full position. 

Thus, you can pick out developing trends in the underlying supply and demand. Therefore, you can take your position accordingly and make the most of the situation. However, this is a long-term approach and requires patience. 

The wrap-up 

As you know, stock markets work on a simple mechanism. They simply match buy and sell orders. However, a situation may arise whereby traders face difficulties in matching their orders. This is because of a trading imbalance.

Trading imbalance means inequality between buying and selling orders. It happens when the market receives too many of one kind of orders and very few counterpart orders. Stock markets may temporarily pause trading of stocks in case of order imbalances. Moreover, trading imbalances may give you a wonderful opportunity to make significant profits. However, day trading isn’t a worthwhile option for retailers. Contrarily, swing trading is a good idea because you can make sure where the smart money is moving. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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