Order book Imbalance refers to the relationship between the buying (Bid) and selling (Ask) orders within a specified range in the order book. It is an indicator that monitors and measures the ratio of Bid and Ask orders to determine the balance of liquidity and potential price movements.
By default, the Order Book Imbalance indicator is set to 2.5%, but you can adjust this value based on your preference and the level of detail you require. The recommended operating range is typically between 2% and 6%.
When interpreting the indicator, let's consider the default setting of 2.5% as an example:
- Increasing Red Candles: if the histogram of the indicator shows a series of increasing red candles, it indicates a preponderance of Ask orders and suggests that the price is likely to rise. This means that the price is reaching towards the liquidity levels where higher sell orders are concentrated. It implies a potential upward movement in the price;
- Decreasing Red Candles: when the red candles on the histogram start to decrease, it signifies a change in the balance of liquidity. This could indicate a reversal in the price direction, suggesting a potential decrease in price;
- Increasing Green Candles: conversely, if the histogram displays a sequence of increasing green candles, it signifies a dominance of Bid orders and suggests that the price is likely to decline. This means that the price is moving towards the liquidity levels where higher buy orders are concentrated. It implies a potential downward movement in the price;
- Decreasing Green Candles: when the green candles on the histogram start to decrease, it indicates a shift in the liquidity balance. This could suggest a potential upward turn in the price direction;
Monitoring the Order Book Imbalance can provide insights into the buying and selling pressure within a specific range of the order book. By observing the changes in the imbalance, traders can gain an understanding of the potential direction of the price and make informed trading decisions.
It's important to note that the Order Book Imbalance indicator is most effective when used in conjunction with other analysis techniques and market indicators to get a comprehensive view of the market conditions and trends.