Liquidity positioning: how to find an entry into a price impulse

Catching a price impulse is every trader's cherished dream. Who would enjoy waiting for profit while stuck in balance, or a long wait for take profit after a correct entry?

The answer is obvious: no one. We all want to get profit as quickly as possible and preferably as much as possible. And for most of us, "quicker" comes first.

In this article I will show a simple but very reliable way to identify an entry into an impulse from balance. In my opinion it works always (by "always" I mean statistical significance at the 0.05 level).

Let us go!

An impulse is a rapid price change with flat and short-lived pauses at the extremes. A directional shift of the value area takes place, in which the first thrust is not traded through.

In fact, a transition into an impulse implies a strong predominance of demand during northward expansion or supply during southward expansion.

In other words, the market orders responsible for the move do not encounter a sufficient number of limit orders. At the same time, the volume of market orders in the direction opposite to the impulse is insufficient to absorb the limit orders aligned with the impulse.

A good impulse wave, as a rule, consists of three expansions (it has at least 2 flat loading areas). In very strong moves there may be more expansions of this kind, but usually after the third or fourth expansion a transition into balance begins, which may lead either to a reversal or to a volatile continuation of the main dynamic.

From the point of view of technical analysis, in an impulse the pullback is limited to 23.65% or no more than 38.2% by Fibo. At the same time, during clear positioning when exiting balance, momentum indicators are often in the overbought / oversold zone, that is, they give false signals.

The picture above shows such an impulse. After the first expansion there is a liquidity-capture zone, above which volume accumulation in the flat began. The second expansion has the same appearance. And only the third expansion is clearly weaker: one may assume a return to accumulation slightly below through a local double top with trading down to the second liquidity-capture zone.

If already after the second, and even more so the first, expansion there is trading of the imbalance zone on the corresponding timeframe, then there may be some questions about the strength of the players in the impulse. In such cases it is necessary to additionally check what is happening on the higher timeframe: is there an exit into an impulse there, or is the game still taking place inside balance.

Let me remind you that the signal of an exit into an impulse looks like this: after breaking the upper boundary of balance and beginning to work in the flat, it is necessary to see further expansion in the breakout direction with a transition into volume accumulation ABOVE the recent push liquidity (captured liquidity).

If there is no holding above the push volumes, but there is activity below these volumes, then in this case a return to balance is possible, which is what we saw in our example.

In such a setup there are two solutions:

Let us look at how our scenario develops further.

We observe a move below the impulse supports, specifically below those where there was a strong volume push, which initially could have been interpreted as the start of a buy impulse.

Then volume accumulation follows in the zone of the most aggressive (first) purchases. In a very good case, accumulation happens lower, using horizontal volumes as resistance.

In other words, we should see the story that we examined in the previous subsection. And we do see such a picture: an impulsive move below the local volume load (that is, a micro-balance) gives a southward expansion on the same timeframe and acts as resistance.

At this point in such a scenario two options are possible, taking into account the comparable volumes passing now and earlier at the lows:

It is exactly option 2 that we will see: three normal impulsive expansions with a transition into a new balance, which I will discuss in the next subsection.

This is how the impulse from the previous section develops on the lower TF: the structure is seen better.

We see the classic three expansions with flat and fast reloads. The transition into balance is a test of the mean after the impulse. The further development of the situation occurs on a different timeframe.

The picture below shows a situation where, it would seem, there is a transition into an impulse, but the structure of the southward expansion suggests that the movement on the current timeframe is limited.

What tells us that playing the impulse at the moment is dangerous?

First, the second expansion, which can also be considered the first after leaving the balance, has an "incorrect" appearance. It is very strong, and the pullback is a little more than 61.8% by Fibonacci.

In a proper expansion, liquidity capture occurs at the price extreme (pushing volumes), after which the expansion continues, and this liquidity becomes protective.

Here, however, we have a price extreme with a return above the volumes that in a local impulse should be protected by sellers. After that, a normal balance forms on the timeframe that is higher relative to the impulse under consideration.

After a long time, a small expansion to the south occurs, which ultimately turned out to be a stop hunt and a V-reversal.

Here is another example. When testing the short pushing zone, the price seemed to show bounces on the lower TF, but the result was a transition into a real impulse in the opposite direction. The "seemed" is important here: the movements in the opposite direction are weak, and then volume work gradually goes higher and higher, as it should in an impulse.

Below is an example where relatively long accumulation after the first expansion gave a continuation of the dynamics. Yes, here there is a test of not very aggressive pushing liquidity with the gathering of sufficient volume right in the local pushing zone, but the structure at the moment is dangerous: there may be either a strong reversal like in the previous example or a strong continuation.

In any case, this is a higher-timeframe game.

The second expansion is relatively short. There is liquidity protection for push-through here, but the balance again takes a long time. The balance itself has a downward appearance, and this is a fairly strong signal for the development of impulse continuation, which is what we ultimately saw.

By the way, in the context of accumulating volumes for a strong impulse move, you can look at the reverse in the previous example, where in the breakout zone of volumes that were previously positioned short, purchases are going higher and higher.

An entry into an impulse can be aggressive or conservative.

An impulse is an aggressive distribution of liquidity accumulated in the balance, large in length and short in time.

Usually an impulse has three expansions with two fast liquidity reloads. A short-term liquidity reload in an impulse looks like a flat (or almost flat) at the extreme and occurs above the captured liquidity of sellers or below the captured liquidity of buyers after leaving the balance.

The best entry into an impulse is after liquidity positioning.

Additional signs of an impulse:

The fewer the signs, the greater the chances that this is not an impulse, but something else. You can make money on that something else, but whether the game is worth the candle, let everyone decide for themselves.

Respectfully,
Ivan Rusin