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Because limit orders are the heavier hand, they are the ones that stop markets in trending environments from advancing or declining as aggressive market participants market orders often hit the limit walls and get absorbed. They show us the finalized transactions on the bid and the offer, referred to as the delta.
They are executed against the limit orders. Market orders are required for the market to move. Whenever market orders exceed the number or limit orders at a given price point, the price ticks up or down. As you take liquidity from the order book, you are a liquidity taker every time you use the market order.
Although brokers off a lot of different order types, these are still just market or limit orders. These are very simple yet important concepts to understand. If you have a high number of resting orders but not many traders executing them, you have a low volatility environment. These are often cases of more liquid products such as Euro Stoxx 50, German yr Bund, or treasuries. The opposite would be the high volume with low liquidity. In these markets, aggressive participants enter the market with a not strong counterparty at the order book, causing high volatile movements.
There are also other tools that show orderflow, such as Times and Sales or Footprint, which I covered in this article. What is Auction Market Theory? Peter Steidlmayer developed the concept of Auction Market Theory. The main idea lies in the fact that financial markets are no different from any other auction where buyers and sellers meet daily. There are two major things to be achieved.
Facilitate trade in the two-way auction process Seek fair value of the asset Auction market theory translates this process through supply and demand dynamics and price discovery. This process is then represented by tools such as Market or Volume Profile. This is what we know as the Value area. This is where is the new value area created. After some time, phones get repaired, and the price of the stock starts to rise again. Where is the market likely to stop? This is eventually what every market does as Market participants negotiate prices between balanced and imbalanced values.
Inside Value area is also a point of control; this is the level where the market traded most volume or spent the most time. The first two weeks of use of the platform give access to its full functionality with 7-day history limit. According to Donald L. Market auction The main goal of the auction market theory is making a trading decision about the asset buy or sell on the basis of analysis of all elements of the current situation — price, time, worth, risk and volatility.
The analysis is conducted empirically, that is exclusively by way of observation. Peter Steidlmayer could be considered the founder of AMT. He laid the basis of the market profile and shifted the accent from the price to the worth in unit time. Steidlmayer tried to forecast the future price movement with the help of the market profile and various types of days but finally had to confess that it was impossible.
Other authors developed AMT after Steidlmayer. We marked the most significant moments below. Some principles do not cohere with the original ideas of Steidlmayer. Influence of buyers and sellers on prices One cannot predict the price movement. Traders work under conditions of uncertainty and use competitive advantages for increasing the chances for getting a profit. Market prices are formed in the process of trading between sellers and buyers. Some price levels, such as highs and lows, do not attract traders.
There are no traders who wish to sell low and buy high. The price flees from these levels. We marked the low, from which the price sharply bounced back, with point 1. The volume is minimal on the day profile near number 2. Volume profile in the auction theory Traders are more active at some levels than at others. Balance areas between sellers and buyers are formed at them.
Such areas have a bell-shaped form of profile. They are called Value Areas in the sources on the market profile. Interrelation between various types of days is insignificant — we cited the Jan Firich statistics in the article about the market profile. The market moves from the balance to trend and vice versa.
The market spends more time in the stage of balance and less time in the trend movement. According to statistics of Jan Firich , we observe the trend movement of the price in the market in 9. Some traders look for a fast profit and trade during a day. Sometimes, trading volumes are higher during the day, sometimes — lower.
The volume measures success or failure of the focused price movement. Auction Market Theory and volumes Some markets move in a wide range of prices and some in a narrow one. The biggest volumes are traded during the first and last hours of regular trading sessions from the point of view of intraday trading. The biggest activity in the global markets falls at the moment of the news and reports issue.
The market could be balanced and then it can move in a certain direction during various periods of time. For example, the trend takes 3 hours and the balance takes 15 days. Trends and balances We marked a trend movement after a breakout with number 1. The price moved in a certain direction only during 2 candles or 1 trading hour. The rest of the time on June 9 the market traded in balance, that is, the price moved up and down within a range, which we marked with a bell.
We marked the next trend movement, which also lasted for only candles or 1 trading hour, with number 2. The market again traded in balance the rest of the time of June We marked the trend movement that lasted for 3 candles or 1. The considered examples took place at the end of the trading session. And the trend movement marked with number 4 fell on the middle of the trading session.
The price broke the current balanced area and entered the trend phase in a search for a new balance. This movement covered 3 candles or 1. Specific features of trades in AMT The global electronic markets are traded much more active than before. The demand and supply changes result in the price changes.
Demand and supply change in the course of a trading session. Market profiles change every day. Traders look for the value. The value is identified by the price, accepted by the parties. Long-term traders move the markets and accumulate positions.
They look for a big trend movement. The majority of traders look for balanced markets for entering into a trade. The majority of traders trade during a day — we provided statistics on various types of traders in this article.
The market profile is a visual reflection of the auction market. And vice versa, from the POC to the high or low. You can calculate a take profit and stop beforehand in these trades. Initiative Initiative — trades for a breakout of the upper and lower boundaries of a balanced area in search for a fair price. It is impossible to calculate the take profit in such trades, you need to wait for a new balance area formation. These trades are more risky, because false breakouts and insignificant extensions of the balanced area often happen.
However, trades in the direction of a breakout are potentially more profitable, because they are intended to catch a sharp and strong trend movement. We will use the basic model of Donald Jones, another famous follower of Steidlmayer.
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Because limit orders are the heavier hand, they are the ones that stop markets in trending environments from advancing or declining as aggressive market participants market orders often hit the limit walls and get absorbed. They show us the finalized transactions on the bid and the offer, referred to as the delta. They are executed against the limit orders. Market orders are required for the market to move. Whenever market orders exceed the number or limit orders at a given price point, the price ticks up or down.
As you take liquidity from the order book, you are a liquidity taker every time you use the market order. Although brokers off a lot of different order types, these are still just market or limit orders. These are very simple yet important concepts to understand. If you have a high number of resting orders but not many traders executing them, you have a low volatility environment. These are often cases of more liquid products such as Euro Stoxx 50, German yr Bund, or treasuries.
The opposite would be the high volume with low liquidity. In these markets, aggressive participants enter the market with a not strong counterparty at the order book, causing high volatile movements. There are also other tools that show orderflow, such as Times and Sales or Footprint, which I covered in this article. What is Auction Market Theory? Peter Steidlmayer developed the concept of Auction Market Theory.
The main idea lies in the fact that financial markets are no different from any other auction where buyers and sellers meet daily. There are two major things to be achieved. Facilitate trade in the two-way auction process Seek fair value of the asset Auction market theory translates this process through supply and demand dynamics and price discovery.
This process is then represented by tools such as Market or Volume Profile. This is what we know as the Value area. This is where is the new value area created. After some time, phones get repaired, and the price of the stock starts to rise again. Where is the market likely to stop? This is eventually what every market does as Market participants negotiate prices between balanced and imbalanced values.
Inside Value area is also a point of control; this is the level where the market traded most volume or spent the most time. The volume measures success or failure of the focused price movement. Auction Market Theory and volumes Some markets move in a wide range of prices and some in a narrow one.
The biggest volumes are traded during the first and last hours of regular trading sessions from the point of view of intraday trading. The biggest activity in the global markets falls at the moment of the news and reports issue. The market could be balanced and then it can move in a certain direction during various periods of time.
For example, the trend takes 3 hours and the balance takes 15 days. Trends and balances We marked a trend movement after a breakout with number 1. The price moved in a certain direction only during 2 candles or 1 trading hour. The rest of the time on June 9 the market traded in balance, that is, the price moved up and down within a range, which we marked with a bell.
We marked the next trend movement, which also lasted for only candles or 1 trading hour, with number 2. The market again traded in balance the rest of the time of June We marked the trend movement that lasted for 3 candles or 1. The considered examples took place at the end of the trading session. And the trend movement marked with number 4 fell on the middle of the trading session. The price broke the current balanced area and entered the trend phase in a search for a new balance.
This movement covered 3 candles or 1. Specific features of trades in AMT The global electronic markets are traded much more active than before. The demand and supply changes result in the price changes. Demand and supply change in the course of a trading session. Market profiles change every day. Traders look for the value. The value is identified by the price, accepted by the parties.
Long-term traders move the markets and accumulate positions. They look for a big trend movement. The majority of traders look for balanced markets for entering into a trade. The majority of traders trade during a day — we provided statistics on various types of traders in this article. The market profile is a visual reflection of the auction market. And vice versa, from the POC to the high or low.
You can calculate a take profit and stop beforehand in these trades. Initiative Initiative — trades for a breakout of the upper and lower boundaries of a balanced area in search for a fair price. It is impossible to calculate the take profit in such trades, you need to wait for a new balance area formation. These trades are more risky, because false breakouts and insignificant extensions of the balanced area often happen.
However, trades in the direction of a breakout are potentially more profitable, because they are intended to catch a sharp and strong trend movement. We will use the basic model of Donald Jones, another famous follower of Steidlmayer. We will try this model on real trading examples in the next sections. Interpretation of the market situation in the chart We marked the balance area, which was formed in the first half of the day, with number 1. We marked the breakout level with a black horizontal line.
The probability of a breakout at this place is very high, since the profile step sharply changes. The profile step is a significant difference between volumes at neighbouring price levels. Volumes fluctuated from to contracts in the middle of the upper marked part of the profile.
And the price formed the balance and moved now up, now down. The number of contracts sharply reduced from 73 to 33 closer to and then to 11 — we marked the reduction of the profile step with number 2. We open a trade in point 3. We cannot accurately follow the basic trading strategy of Jones here. We would post a limit order at the level of the profile step change from 73 to 33 contracts. We close this trade in point 3. Take profit calculation It is difficult to calculate a take profit in breakouts beforehand.
There are several variants: we wait and monitor the development of events, but there is a danger to lose a part of the profit in this case; we calculate a take profit beforehand — for example, a half of the previous price movement; we close a trade at the end of the trading session; we wait for formation of the middle of the next balance area — we selected this variant.
Extension of balanced ranges We already mentioned that breakouts are the most profitable and, at the same time, the most risky trades, because sometimes the balanced ranges extend with the help of false breakouts and the price comes back to the middle of the value area. There are signs of a true breakout in our chart: A lower new price high after ; There are three consecutive red candles just before the breakout, which means that the trading moved down.
It is sufficient to understand the logic of the market movement. Remember that there is risk in each trade, namely that is why we use protective strategies. We selected this variant of the footprint because we want to concentrate on the shape of bars and number of contracts, traded at each price level. It is much simpler to close a trade in this chart. The footprint makes the market situation clearer and simpler even with such a relatively long time range as the hourly period.
The better the understanding is, the more nerves are saved and the higher the profit is. Auction Market Theory and the order book This is not the most vivid example, because the trading activity is, as a rule, lower than usual on Fridays at the end of the main trading session.
The price of a Moscow Exchange index futures smoothly went down starting from The traders who sold during the whole day would wish to buy at the end of the day to register profit. It is an important moment since the buys would push the price up.
What did happen in the tape? A major sell of contracts at the price of , took place at
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