What is the purpose of the Auction Market?
To facilitate trade between buyers and sellers so that they may find an agreeable price. The auction market is the essence of the supply-demand equation, in fact Auction Market Theory allows a trader or market analyst to make decisions strictly based on market generated data that is a direct reflection of supply vs demand.
What is the outcome of an Auction Market?
Balanced Market Profile
The price of something is never static, as rational people have different motivations and criteria for settling a price over a period of time. But within that period of time, the various prices that are negotiated can be plotted in a Gaussian distribution—a bell curve.
The majority of negotiated prices fall within the hump of the curve. This is called the High Value Node (HVN). The outlier prices are on the tails of the curve, these are referred to as “unfair price,” or “extreme.” When the distribution curve is well formed, and appears to look like a bell, with equal distribution of price on either side of the HVN, it is said to be “In Balance.”
The prices inside the HVN represent 66.7% of all the volume of trades within the time period that the curve plots. The diagram to the right is called a Market Profile, and it is one of the primary tools of the Day Time-Frame Trader, the Auction market Trader.
What is the theory behind Auction Markets?
The market is a complex system and Value(the High Value Node), or predominant price, is the primary variable in that system describing the market. Market profiles are the primary component of the system, and they are analyzed individually (intra-day or over multiple days), as well as in relation to one another. The relationship between these profiles is what describes the market and how it works.
Market Profiles have many aspects to them, and the study of the shape and relation to one another is where Auction Market Theory provides reliable information for making trade decisions. The advantage is that these decisions allow for trades with extremely high reward to risk ratios.
