auctions near me | Order Flow and market auction principles

Order Flow and market auction principles






There are two elements with which markets always report activity, they are fundamental and form the basis of the auction of financial markets: price and volume. Most traders that use volume analysis are guided by the Theory of Auction. This theory has six basic concepts.

All concepts are linked to the causes of price changes in financial markets under the influence of order flow. Price changes arise as a result of the activity between buyers and sellers, that is, the change in prices is due to an imbalance in the flow of sales orders.

The first principle of Auction Theory deals with the most powerful forces of the market, supply and demand.



First Principle of Auction Theory

In the market there are sellers and buyers that bidirectionally raise or lower the price, executing (in the case of aggressive entries) and placing (in the case of passive entries) orders by Bid and Ask. Buyers form the demand and sellers create the offer.

Buyers (demand) are reflected by Bid prices, sellers (offer) - by Ask prices. Between these two groups there is always a dynamic interaction, and the interaction is expressed through volume.

From all the above, we can conclude that if the price moves in a certain direction, incorporating more and more supply and demand, at a certain moment the prices that will be attractive for both groups of operators will be established.

Representatives of different timeframes participate in the auction, for example scalpers, daytraders, hedgers, long-term investors, the broader the movement, the more representatives from different periods are involved in the auction process. The unidirectional auction ends with the last participants wishing to buy or sell.

If the demand exceeds the supply, the prices will start to move up, and on the contrary in the case of the offer.

The auction works as a mechanism for the search of prices and information. Mainly the market moves up until the buyers are exhausted, and on the contrary: it will move down until the sellers are exhausted. This process is called bidirectional bidding, which means that the end of the bullish auction is at the same time the beginning of the bearish auction and vice versa.

The market moves up in the search for sellers capable of making a counter movement, and as a result of this the upward movement stops, while in a downward negotiation, it would happen in reverse.

The second principle of the Theory of Auction is that any market seeks to facilitate the exchange of goods, services, stocks, or any other tangible and intangible asset, and how many more people are involved in this exchange (trading) in a given market, best.
Second Principle of Auction Theory

The market facilitates buying and selling among its participants through the auction, and with the help of the auction each of them can see the directional movement of the market, that is, you can see the continuation of the current trend, the climax from the current trend, consolidation near the price of a climax, the continuation of the trend or the change of direction of the current trend.

Understand if the offer, or in your case the demand dominates in each specific moment can give clues about possible direction of the next trend.

The third principle of Auction Theory helps us understand how volume for a price can determine an area of ​​value.



Third principle of Auction Theory

Before opening an operation each trader must have criteria to define the possibilities of operating in the market. The best opportunities to trade arise when the trader buys cheaper or sells more expensive than the fair value.

The area of ​​fair value of an asset is that area where there is agreement on the value in respect of a certain level of prices, in other words there is acceptance with respect to the determined area.

In this area we will see the accumulation of several high volume clusters that will then determine the key levels from which buyers will move the price up and / or sellers will move it downward. The area of ​​fair value is clearly seen only when the market is in equilibrium.

The auction process moves the price up or down, in other words the auction participants are looking for the fair value that will satisfy most traders. Directional movement establishes the limits of the area, the highest price above and the lowest price below.

As soon as the market establishes the area with the ends on both sides, begin operations within this area to agree on the fair price. The market is operated within the area until the price does not break the upper or lower end.

Close to the level of the fair price will be high volume clusters, they will concentrate about 70% of the entire volume traded in a certain period of time, however you have to take into account that the Value Area It is not static and can be changed throughout an auction session.

The market is not stagnant, it changes in the process of the auction, as well as the opinions, the expectations, the perception of its participants.

We must realize that at any time the character of the market can change, anything can happen at each moment of the auction. The market that was balanced can become unbalanced under the influence of some part of the market operators.

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The fourth principle of Auction Theory tells us that the change from the price balance to the imbalance consists of four steps:
Fourth Principle of Auction Theory

- The phase of disequilibrium, in other words the trend, begins when the price starts moving in a direction outside the area of ​​volume accumulation (higher or lower).

- Directional movement stops when reaching a level of exhaustion. At this level the dominant group of traders loses interest in following the movement and temporarily stops moving the price up or down, and also begins to close open positions previously.

- The accumulation of volume begins, that is, the volume accumulates around the level of exhaustion, the market balances.

- The last step is the exit of the balance, the market again begins the directional movement outside the area of ​​volume accumulation.

The price goes ahead of the volume and very often returns to make the test of the previous accumulation zone, these tests provide traders with the knowledge of the strength of the trend in one direction or another.

The understanding of the fourth principle of Auction Theory leads to the fifth principle that states that the price movement is within the framework of two cycles: in consolidation (balanced) and in trend (unbalanced).



Fifth Principle of Auction Theory

In consolidation the market moves horizontally, in trend the market moves vertically. Balance refers to trade within the area. The imbalance in turn is the trend.

Properly stated, the market moves from the balance sheet towards imbalance, from the accumulation of volume towards distribution.

The market is more efficient when balanced. In this state he remains about 85% of the time. Thanks to the rules of the auction we know that if the market loses its balance, then it will try to return in this state.

If the market is balanced, the forces of the sellers and buyers are equal. That is, the market operates within the area because the fair price appeared about which the negotiations are executed.

As we have seen before, the objective of the market is to facilitate the negotiation, rather it is to attract the maximum amount of traders of different timeframes. If we look at the market, we will see that he is always looking for the balance between sellers and buyers.



And to reach that balance, you have to find the right price, so that bidirectional bidding is possible in your area. When this price is found, 70% of the trading volume is concentrated around you.

If the intentions of the participants are changed, the market begins to act under the influence of the buyers or sellers, that is, one of the parties begins to dominate. The price starts to move upwards, which means the search for the sellers and vice versa.

In other words, the price moves seeking the right level, around which the market can benefit bidirectional trading. Speaking briefly, the balanced market has found the right price and the trend market (unbalanced) is still looking for it.

The operator's job is precisely the ability to distinguish consolidation and trend to have the possibility to apply the appropriate trading strategies. In fact, one of the main objectives of the winning strategy is to correctly define the context of the current market.

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In the case of the market in equilibrium, the trader can use the strategy based on the rebound of the price, that is, to look for rejections near the ends of the area of ​​fair value. On these occasions the volume dries up when the price goes outside the limits of the area and the price tends to go back inside.

In the case of the unbalanced market, the trader can use trend tracking, buying retracements in an uptrend and selling rebounds in a bearish one.
And finally, the sixth principle of the Theory of Auction is about a relationship between market conditions and the behavior of both groups of participants: sellers and buyers.

Here we refer to the different behavior of the sellers and the buyers that we divide into reaction (Responsive) and initiation (Initiative).

According to the logic explained above when the price goes out of the area limits upwards, the sellers see the possibility of selling, and on the contrary the buyers will see the exit of the price down as a good opportunity to buy below the fair price. This type of activity is called "reaction", it is often seen in balanced markets and denotes consolidation.



Sixth principle of the Theory of Auction - Reaction activity

The activity of initiation, on the contrary, with the exit of the price of the area down, causes the new and aggressive sales, or with the exit of the price of the area upwards, provokes the new and aggressive purchases. This type of activity is called "initiation", arises when there is imbalance and denotes the trend.



Sixth principle of the Theory of Auction - Initiation activity

In my modest opinion you have to know the key points of Auction Theory, first, to understand how the market works and secondly, to be able to correctly interpret the Order Flow chart. Through order flow we can see multiple ticket opportunities that arise every day in the financial markets.

If you found interesting, you would also like to complement and extend the information, here we leave a link to the Webinar "Order Flow and principles of market auction"

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