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Auction Market Theory

In order for you to understand what I’m looking at, you must understand auction market theory. If you see the market as simply a bunch of flashing lights, spaghetti lines on your charts and numbers, then you are likely someone who is approaching the market with similar odds as a gamer and it will be hard to attain consistency. Your broker loves you though. Put simply, the market is an auction. Price is set through a process called “price discovery”. This is where the buyers and sellers will continue to move the market in one direction or another until the opposite force is motivated enough to step in and stop the advance. The market will auction as high as it needs to in order to find sellers or as low as it needs to in order to motivate buyers to see it as “relatively cheap”. The tool most commonly used to “gauge” the auction is Market Profile (MP). I can probably give a 6-hour lecture about MP, but you can research it on your own.

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