Auction Market Theory: Understanding and Applying Market Dynamics

Hello everyone, How are you doing, I welcome you again to my blog in the Steem Alliance community.

Today, we will discuss an interesting topic on the platform which will be Auction Market Theory: Understanding and Applying Market Dynamics

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• Introduction

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Auction Market Theory is a key idea that provides a deep understanding of how financial markets work, with auction market theory, traders can gain a better understanding of price changes and market behavior by analyzing the markets with the process in which buyers and sellers compete.

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In this article, we will discuss the fundamentals of auction market theory, its application to chart analysis, and trading strategies based on it are all covered here as well, READ ON.

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Principles of Auction Market Theory

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Understanding the Theory of Auction Markets

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The foundation of auction market theory is that markets operate as continuous auctions in which buyers and sellers will always compete to set prices, In comparison to traditional auctions, which sell only a single item to the highest bidder, financial markets offer a different range of actions where Prices change according to supply and demand.

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Key Concepts

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1. Market Participants:: According to the theory of the market, partakers are divided into two primary groups: responders, those who provide liquidity by taking the initiators' offers, and initiators, which are who aggressively try to buy or sell.

2. Price Discovery: A fundamental idea in price discovery is that the market is always looking for a balanced price to balance the demand from buyers and sellers because markets are dynamic and continually changing as a result of shifts in supply and demand, so, therefore, this balance is usually temporary.

3. Area of Value: The Area of Value is the price range that sees the majority of trading activity, It is the mutually agreed price between buyers and sellers and usually accounts for roughly 70% of all trade volume in a particular period of time.

4. Market Profile: This is a market analysis, and it is a method of charting that is related to auction market theory that shows time or volume on the horizontal axis and price on the vertical.

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• It is a chart depiction of the areas of value and interest where the market has traded most frequently or the area where the market price has been the most.

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Phases of Auction Market Theory

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According to the auction market theory, markets go through these different stages we shall treat below:

1. Balance(Consolidation): During this stage, the market locates a value zone where prices move in a small range, and as a result of the price agreement between buyers and sellers, the situation is generally steady.

2. Imbalance (Trend): When comes a piece of fresh information into the market, the balance is triggered, leading to an imbalance, and as a result, prices change as the market looks for a new value region.

3. Rebalance: After an imbalance, causing a period of consolidation as the market settles into a new value area, we can conclude that the market has regained a previous position.

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Using Chart Analysis With Auction Market Theory

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Market Profile Charts

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One common method for using Auction Market Theory in chart analysis is the use of market profile charts, charting the price on the vertical axis and time or volume on the horizontal axis.

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These charts create a profile—a bell-shaped curve, therefore the profile's form gives insight into consumer behavior.

1 . Point of Control (POC): The price level where the majority of trading activity took place in a particular market session is known as the POC, and It stands for what the market considers to be a fair value.

2 . High and Low Volume Nodes: High volume areas on the chart are used to indicate the levels of interest and can possibly be marked as the area of support or resistance, and also this is the area where volume moves quickly, in any case, that the market wanted to change a narrative, this is the area where it can breakout.

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Conclusion

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Here comes our conclusion on auction market theory, we have successfully discussed the principles of this theory and its key concepts being market participant, price discovery, and value area.

We also discussed the 3 phases of the auction market, where we usually see a consolidation, before an imbalance which afterward the market is likely to gain its Rebalance, in the coming slide, we shall discuss deeper on its application on chart analysis, and also some trading strategies based on this theory, THANK YOU.

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