The concept of balancing markets


I believe, Peter Steidlmayer was a pioneer in many ideas related to market analysis. He introduced such a tool as a market profile. Also, he told about the cyclic way in which the market does develop. The basic neverending cycle consists of the following stages:

  • balance
  • trend
  • balance 
  • trend
  • and so on

The current chart from the gold market (I use data from Moscow Exchange) – is a good example to learn this useful concept.

After several days of decline, the big profile on the left side formed the wave curve. When the profile is big – the market develops the stage of balance, when a profile is thin – this is a character of the stage of a trend.

The stage of balance

What is it? The stage of balance means that the market found temporary equalizing between buyers and sellers. The party of buyers (driven by bullish factors) meets the party of sellers (driven by bullish factors). Factors could different – fundamental (economical news, official reports), technical (breakout of important line, volume patterns) and other (psychological, rumors). But at a given time, bullish factors and bearish factors find the approximate balance. Mostly, the party of buyers and party of sellers are equalizing.

The typical signs of the stage of balance:

  • price moves sideways, with fake breakouts
  • its fluctuations form the narrowing wedge
  • profile goes thick

And when new factors arrive – the balance destroys. Price breaks out from the wedge pattern – and enters into the stage of the trend.

The stage of the trend

What is it? The stage of the trend means that the market lost a temporary balance between buyers and sellers. And the price is searching the levels where buyers and sellers will be equalized.

The typical signs of the stage of trend:

  • price moves in established direction – up or down
  • its fluctuations form the trending channel 
  • profile goes thin

Example

Refer to the gold chart.

  • 1-2 – Former balance
  • 3 – Breakdown by selling volume. Entering into the down-trend stage
  • 4-5 – Former balance
  • 6 – Breakdown by selling volume. Entering into the down-trend stage
  • 7 – Panic Selling. The balancing wedge should form
  • 8-9 – The current balancing wedge

Why it is hard to make profits

When the market develops the stage of balance – it is hard to make profits because traders have not much difference in price to form the profits.

When the market develops the stage of the trend – it is hard to make profits because price moves fast away from traders. Chasing the price decreases the reward but increases the risk. 

The ideal moment to establish the position – just before the breakdown from balance. But it is always unclear where the market will go on the next move. 

How to trade?

The concept of balance helps to understand what is going on and where are the prices moving. But we are very interested in the way how to use it in making trading decisions. Unfortunately, there is no guaranteed an easy way to make profits. All we have to do – decrease the risks and keep potential for profits.

But here are some suggestions on how to increase the results with the concept of the market balances.

  • Try to sell the minor top after a bearish breakdown from the previous balance (points 10). The risk is low here.
  • An increase in selling volume (red delta – 11) indicates a preparation of breakdown.
  • Extreme Panic volume (7) increases odds for the future bullish breakout.
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