Table of Contents
Market imbalance refers to a situation when the depth of market on one side significantly exceeds the other side. This is usually a result of large limit orders placed at specific price levels.
However, while the order book imbalance can often provide insight into potential supply and demand at different price levels, it is not the sole factor driving price movements. There are several reasons why prices might move in the opposite direction of the imbalance.
- Aggressive Market Orders: Aggressive market orders can drive the price in the opposite direction of the imbalance. This usually occurs when a strong sentiment or momentum in the market outweighs the existing imbalance.
- Order Cancellations: Sometimes, large orders that create the imbalance may get canceled before being filled, especially if the price is moving in the opposite direction. This common tactic algorithmic traders use can create a ‘false’ signal.
- Market Manipulation: In some cases, large orders can be placed to create the impression of a significant supply or demand at a certain level, with the intention of driving the price in the opposite direction. This is often referred to as ‘spoofing’ and is considered illegal.
- Other Market Factors: Numerous other market factors, such as news events, economic data releases, changes in market sentiment, etc., can override the order book imbalance and drive the price in the opposite direction.
In conclusion, while order book imbalance can be useful to gauge potential supply and demand, it should be used in conjunction with other market analysis tools to confirm trading signals.
Noticeable:
If the price moves counter to the imbalance, liquidity may be cancelled, indicating the algorithm doesn’t anticipate trading at that level.
