Today we're gonna look deeper at the Balance Excess indicator using it to read the daily auctions ( or whatever time frame you may use ).
So now that we know about balance and excess we will use them to define the start of a new auction.
A new auction will start when we get an excess bar or a breakout from a balance area that goes against the current active auction. For example the current action is down and we see a buying tail or a balance area breakout on the upside. That would start a new up auction. That's it ! not very complicated...
The auction direction is very important because it will tell us which side offers the best risk-reward potential.
It is always preferable to trade with the trend ( auction direction ) because with are trading with the flow.
Slowly but surely we are putting all the pieces together toward a trading strategy that makes sense. This daily auction analysis will be the first step that we will take EVERY DAY to adapt the way we will approach the market.
Today I will talk about excess.
Market excess exists when prices have extended too far above / below value.
"Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value." from Mind over Markets.
Why are these levels important ? They can act as key future support and resistance points. These levels represent price rejection. No time = no acceptance.
Balance and Excess indicator will spot these excess for you according to your rejection definition. ( number of rejection ticks surrounding excess lows and highs ). Not only do they represent rejection but they also very often start a new auction.
That's how we will use excess in our trading. Combined with the balance areas they both will help us figure out the current market auction direction so that we will lean toward it.
Today I will talk about the Balance Excess indicator and how to use it in the trading context. Specially I will explain the balance concept in this article.
Most of the time the market will show two conditions : either it will be in congestion ( we use the term balance ) or it will be trending. Every auction will have trending and balancing behaviors.
Balance is a period of congestion where demand and supply meet together. It is a rotational market where price is contained within a defined bracket. Balance and Excess indicator picks these conditions automatically. You can even color these areas to make them stand out.
Understanding this very important concept will have an impact on the trading plan. We will trade balance areas differently than trending conditions. We will use this indicator mainly on the daily bar chart but you can also look the weekly and or monthly bar chart for a longer market perspective. As I am a short term trader I am most interested by the daily time frame.
We will use this indicator to answer two important questions : the auction direction and the aging of the auction.