Thread by @gocharting

[1/X] Attempt to explain Imbalance Chart to a 10 year old
You want into an air conditioner (AC) in the peak summers.. the shopkeeper tells you that the price of the AC is 35 k, which you think is expensive.. this price of 35k which the shopkeeper quoted is Ask Price

[2/X] Since you feel the ask/offer price by the shopkeeper is high, you tell him that you can pay 30 k for the AC.. this price quoted by you is the Bid Price

Now one of you (shopkeeper or you) has to accommodate for the sale of the AC. This is an Auction

[3/X] Since it is peak summer and the demand is high, the shopkeeper isn't budging..so you go ahead and buy the ac at his offer/ask price.. this is called Lifting the Offer

[4/X] Now let's consider one more example.. you want to sell your old car.. but the demand for old cars in the present market isn't that good.. A buyer comes to you to purchase your old car..

[4/X] You tell him the price of car is 100K (Ask Price) .. but he isn't willing to pay that and is willing to walk away unless you give him car for 80K (Bid Price). He isn't going any further up.. so what do you do.. you reduce your ask/offer.. This is called Hitting the Bid

[5/X] In both the cases you were the aggressor.

Now let's focus on Imbalance.

[6/X] Imagine yourself going to farmer's market. What do we do when we buy vegetables .. we bargain. You want a kg of tomatoes. Shopkeeper tells you his ask/offer price as 20/kg.. and you tell him your bid price of 10/Kg. Now plot the bid and ask opposite each other in a table.

[7/X] The offer/ask price of the shopkeeper of 20 would be on the upper right and your bid price would be on the lower left.

[8/X] Now you start bargaining.. you move up to 12 (move up the left side of the column) and the shopkeeper moves down to 18(moves down the right side of the column).. this keeps on going till you reach the price of Rs 15 and you finally buy the vegetables. Auction ends

[9/X] Next guy walks in and starts another auction. This is exactly what is happening in the markets.. just at a very large scale. The auction always takes place diagonally with the bid price (limit buy order) on the left side and the ask price (limit sell order) on the right

[10/X] What is imbalance? Consider the buying vegetable example again; only this time when you go to buy tomatoes another 10 guys are standing right besides you as this particular shopkeeper has the last remaining 5 kgs of tomatoes.
What do you think is going to happen

[11/X] You immediately buy at 20, the next guy at 21, the one after that at 22 and so on.

Why do you think this is happening?

[12/X] There is a gross mismatch between the buyers and the seller in this case.. guys are lifting the offer one after the other. Buying frenzy

Now once this proportion of aggressive buyers to sellers is more that say three times, you say there is an imbalance of 300%

Cool?

This same behaviour is seen in the Imbalance Chart