Applying Auction Market Theory with Chart Analysis

badmus-official (74)Authorised Userin Steem Alliance • last year

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 Applying Auction Market Theory with Chart Analysis

Introduction

We discussed the principles of auction market theory and its key concepts which are: market participant, price discovery, and value area.

Now, we shall discuss how to apply the auction market theory to chart analysis and also give some trading strategies based on this theory, READ ON.

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Applying Auction Market Theory to Chart Analysis

Identifying Market Phases

By knowing the exact phase that the market is currently in, traders can use this to determine if the market is in an imbalanced or balanced market by analyzing the Market Profile charts:

Balanced Market: Generally speaking, a balanced market profile is usually shorter and wider, meaning a range-bound market in which sellers and buyers have reached a good agreement for the worth of the asset.
The Unbalanced Market - This market is sort of narrower and taller, an unbalanced market usually indicates a substantial directional change as the market looks for a new value to reach.

Volume Profile

Volume Profile is a charting method that sort of plots trade volume at each price level instead of time, much like Market Profile does.

So, therefore, it helps by offering important insights into market emotions and prospective price levels of interest, this tool helps traders in identifying areas of high and low volume, meaning where the market is more active.

Trading Strategies Based on Auction Market Theory

1. Trading in a Balanced Market

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When a market is in a balanced condition, prices usually fluctuate within a specific range. Value area, POC, VAH, and VAL are tools that traders can use to determine the perfect entry and exit points:

Buy at Support: Traders who are already expecting that the market will stay in the value area can aim to buy when the market is close to the Value Area Low (VAL).
Sell at Resistance: When you notice that the market continues to stay within the range, selling close to the VAH should be a consideration at that moment, although you can wait for more confluence.

2. Trading in an Unbalanced Market

The market enters an imbalance phase when you notice that it has broken out of the balanced phase, which usually leads to new trends, causing more price movements:

Breakout Trading: When the price moves extremely outside the new area, you should place a position in the direction of the breakout.
Using Low Volume: As the price moves through these low volumes, these regions can potentially act as entry areas for trend-following strategies because they quickly move past the key area.

3. Reversion to the Mean

Markets usually return to the mean area, especially after a significant strong move:

Fade the Extremes: When you notice that the market is overextended, you might want to fade the price extremes in the expectation that there will be a pullback towards the POC or value area.
Watch for Rebalancing: When the market moves out to a new value area after an imbalance, watch for indications of rebalancing, as this could be the new price range of the market.

4. Market Profile Scalping

Market Profile can be used by scalper traders to find short-term opportunities, especially during a particular trading session:

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POC Scalping: As the market moves within the range of the POC, scalpers should enter a trade to profit from small price divergences only and be out as quickly as possible.
Volume Spikes: Volume spikes are also another key area to watch out for as a short-term trader, when it is close to the key region whether with high or low volume, consider entering trades based on the market reactions to these regions, so as avoid being trapped in a trade.

Conclusion

A special understanding of market dynamics is provided by the auction market theory, which emphasizes the process of price discovery that is generally controlled by the interactions between buyers and sellers, which is what has always moved the market, demand, and supply.

Through the understanding of Auction Market Theory and the utilization of analytical tools such as Market Profile and Volume Profile, traders can acquire a meaningful understanding of market dynamics and can also improve their trading strategies.

The strong framework offered by the Auction Market Theory is to help traders find opportunities and manage risk in both balanced and imbalanced markets.

To become better at using Auction Market Theory urself in trading situations, you definitely need excessive practice of this theory, just like with any other trading strategy, you need to keep in mind that no strategy is 100% accurate, and this usually takes time and dedication before one can become better at it.

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