Market Inefficiency Signals: Clues the Auction Is About to Move
A market inefficiency signal is the market basically admitting it’s off-balance. Price isn’t trading clean, the auction isn’t two-sided, and orderflow is hinting at an upcoming adjustment. When the auction is inefficient, the market corrects it through movement—usually fast, usually violent.
What an Inefficiency Actually Is
An inefficiency is not “the market being wrong.” It’s the market saying:
“This price doesn’t reflect actual supply and demand. We need to fix it.”
Inefficiencies show up when:
- price skips levels
- liquidity disappears
- one side dominates the tape
- rotations stop forming
Combine this with microstructure imbalance and the picture gets clearer—the auction is tilting hard.
Common Inefficiency Signals
- Large candles with no overlap — no two-way trade
- Thin volume pockets — no participation
- Fast acceleration through multiple levels
- Repeated failed counter-moves
- Back-to-back stop runs
This is also where liquidity voids form. Inefficiencies and voids are basically two sides of the same coin.
Why Inefficiencies Cause Expansion
The market loves balance. When the auction becomes inefficient, the market “repairs” it by:
- filling gaps
- building new volume
- rotating through untested prices
- running stops to rebalance positions
This usually shows up as a sharp directional move—price is fixing unfinished business.
Signs the Market Is About to Expand
Expansion often follows the same string of clues:
- Price compresses into a tight wedge
- Volume dies as participants wait
- Orderflow becomes one-sided
- Wicks appear only in one direction
This is the air compressing before the tank explodes.
How Inefficiencies Trend vs Reverse
1. Trend Continuation Inefficiency
Price moves too fast, builds no structure, then pulls back and continues the original direction.
2. Exhaustion Inefficiency
Price spikes, fails, then reverses because the move was unsustainable. You’ll see absorption at the extreme—covered in Market Absorption.
How to Use Inefficiency in Your Trading
1. Don’t Fade Inefficient Moves
If price ripped because liquidity vanished, trying to fade it is suicidal.
2. Trade the First Pullback After Expansion
The pullback into a recently repaired area is often the highest-quality entry.
3. Respect the Market’s Need to “Fix” Its Own Mess
If the market left a sloppy footprint, expect it to clean it up. That’s your roadmap.
The Bottom Line
Market inefficiency signals warn you that something is off in the auction. Price is unstable, flow is one-sided, and the market is about to fix the imbalance the only way it knows how—through movement. Learn to see these signals early, and you stop trading blind into expansion.