Footprint Charts: Imbalance, Absorption, and Auction in Trading

In a previous article about Footprint Charts, we covered the basics: defining price “footprints,” exploring common visualizations, and comparing them to traditional candlestick charts. If you missed that article, it's worth going back to review it.

Read the article: “What is a Footprint Chart?”

Today, we’ll delve into three key strategies for using Footprint Charts that can enhance your trading.

Imbalance and Stacked Imbalances

Markets naturally aim for equilibrium—a state where buying and selling volumes are balanced. However, this balance is not always achieved. When markets experience an imbalance, it signals a significant skew towards one side, which traders can leverage to gauge trend strength and identify potential areas of interest.

Imbalance in a Footprint Chart refers to the difference between Bid and Ask volumes. Depending on your strategy and the software you use, this value can vary. For instance, ATAS sets it at 150%, while Exocharts sets it at 250%. You can manually adjust the imbalance threshold, with 300%-400% being common preferred values.

The difference between Bid and Ask volumes is read diagonally, reflecting how the Depth of Market (DOM—explained in our previous article) places executed buy and sell contracts on different price levels (sells at the bottom left, buys at the top right). Since the Footprint Chart represents past DOM data, the imbalance is evaluated as it would have been in the DOM, diagonally.

While real-time DOM assessments are possible (and often used by short-term traders), they aren’t viable for historical analysis. This makes Footprint Imbalance crucial: it allows traders to see who dominated the market at specific times and price levels.

How to Identify Imbalance in a Footprint Chart. Source: exocharts.com

In the image above, two Imbalances are highlighted: one cluster with a Bid value of 577k and an Ask value of 1.3M. The software (Exocharts, in this case) compared these values diagonally. The differences—between 577k and 42k, and 209k and 1.3M—exceeded 250%. As a result, the clusters were highlighted, with blue indicating a bullish imbalance and red a bearish one.

During a trading day, many imbalances can form. To filter out noise and focus on high-probability setups, the concept of Stacked Imbalances was introduced. This term refers to three or more imbalances forming consecutively.

Visualizing Stacked Imbalances. Source: exocharts.com

Stacked Imbalances signal the dominance of either buyers or sellers. It’s crucial to consider not just the color of the cluster but also where these imbalances form and the direction of the candle (whether it’s in an uptrend or downtrend).

Using Bullish Stacked Imbalances in Trading. Source: exocharts.com

In the above image, a Stacked Imbalance forms within a bullish candle, indicating strong buyer momentum. The buying volume wasn’t absorbed by limit sellers, allowing the price to move higher. Eventually, this Stacked Imbalance was retested, leading to a new Swing High.

Using Bearish Stacked Imbalances in Trading. Source: exocharts.com

The same logic applies to bearish Stacked Imbalances. In the example above, the imbalances formed within a bearish candle, where market sells overpowered limit buyers, creating a resistance zone. Later, the price reacted to this zone and moved to a new Swing Low.

When Stacked Imbalances form within a candle's wick, it often indicates that the dominant side can't sustain the trend. This situation is known as Absorption.

Absorption of Market Sells (left) and Market Buys (right). Source: exocharts.com

For instance, bearish imbalances within the lower wick of a bullish candle indicate that market sells were absorbed by limit buyers (shown on the left). This suggests the market reached significant support, potentially leading to a reversal. Similarly, bullish imbalances (on the right) indicate that market buys were absorbed by limit sellers.

Absorption Model

Absorption refers to a scenario where a large number of market orders are absorbed by limit orders, often occurring at key zones or levels of interest. To fully grasp how this model works, it's important to understand the underlying dynamics.

Imagine you're a major player wanting to buy a significant amount of BTC at the best price possible. There are two basic approaches: using market orders or limit orders.

However, both of these have their limitations:

1. Market Orders: These ensure that your order gets filled, but not necessarily at the price you want. If there aren’t enough limit orders to sell BTC at your desired price, your market orders will fill at increasingly worse prices, resulting in slippage—where you end up paying more than expected.
2. Limit Orders: These orders are visible on most cryptocurrency exchanges. If you place a large limit order, other traders may notice it and front-run your order, taking the liquidity for themselves. Additionally, your limit order can be canceled at any time.

An alternative approach is Order Clustering—a strategy where a large position is built up under favorable conditions. The large player breaks down their order into several smaller limit orders, placing them across multiple price levels, usually around Swing Highs or Lows, within imbalances, or just outside consolidation zones.

Order Clustering Visualization. Source: tradingview.com

Spotting true Order Clustering on a traditional candlestick chart is difficult; a trader can only guess these zones since the chart doesn’t show the interaction between Bid and Ask prices. However, Footprint Charts can help visualize Order Clustering through the Absorption model.

When looking for Absorption, traders use the Delta Profile to examine distribution areas, volume, and the dominance of Bid or Ask. In bearish absorption, the volume will be concentrated in the upper part of the candle, with clusters showing a positive delta. For bullish absorption, the pattern is reversed.

Bullish (right) and Bearish (left) Absorption. Source: exocharts.com

The Absorption model often resembles the letters “B” and “P” depending on the direction. While these shapes can aid in identifying Absorption, seeking perfect “B” or “P” formations can overly complicate the analysis.

Examples of Bullish Absorption Formation. Source: exocharts.com

In the image above, a bullish Absorption is forming. Notice the key level marked with a “✓”. As the price crosses this level, a significant number of market sell orders enter the market, closing longs and opening new shorts. All of these orders were absorbed by limit buy orders.

This exhausted the sellers, leaving the market depth on the sell side empty. Now, even a small amount of buying pressure can push the price higher until it meets new resistance from short sellers.

This phenomenon is known as an Automatic Rally, a concept you may have encountered when studying Wyckoff's methodology.

Finished and Unfinished Auctions

Price movement continues in one direction until the dominant market participants lose interest in trading. The price of an asset will rise as long as buyers are willing to buy and fall as long as sellers are willing to sell.

Using Bid-Ask Footprint charts, traders can identify levels where a finished or unfinished auction has occurred. A finished auction occurs when the Bid equals zero at the candle's high, or the Ask equals zero at the candle's low. Conversely, an unfinished auction happens when both buying and selling activity continues at the candle's extremes.

Finished and Unfinished Auctions. Source: exocharts.com

A finished auction indicates a potential price reversal, whereas an unfinished auction suggests that the price level may be tested again in the future. As shown, the price reversed after clearing the unfinished auction level and forming a finished auction.

Applying Footprint Strategies in Trading

To increase the probability of successful setups based on Footprint strategies, it's beneficial to apply them in combination. For instance, consider opening positions using only those Absorption models that:

• Occur in areas of interest on higher timeframes
• Include Stacked Imbalances
• Form a finished auction

In the image below, an example of such a setup is shown. This position was opened following the rules mentioned above, alongside classic technical analysis.

Trade Setup Using Footprint Strategies (see logics below). Source: tradingview.com

When the price approached a higher timeframe resistance zone, the Footprint chart indicated an absorption model, a finished auction, and Stacked Imbalances. This pointed to the strength of sellers and the weakness of buyers. The overall downtrend supported this idea, leading to a short position being opened after a Quasimodo pattern (similar to the Head-and-Shoulders pattern), targeting the Swing Low zone.

Final Words

The Footprint Chart strategies presented in this article are not exhaustive but should be sufficient to start integrating Footprint analysis into your trading. Over time, you will likely identify price “footprint” patterns and develop your own interpretations of Footprint clusters.