Auction theory
Auction theory
Auction theory is one of the fundamental concepts in financial markets, that’s because the basic principle of price movement in the market is based on auction theory.
According to the auction theory, the price will rise as long as the buyers are willing to buy and maintain this desire. If the desire to buy in the market decreases, the desire to sell is created and it is the sellers who take over the market.
For a more complete understanding of auction theory, it is better to look at a traditional auction. For example, imagine a painting that is belong to a famous painter and is auctioned for a base price of $100.
After the base price is announced by the operator, the buyers announce their bid prices, in the initial steps, the bid price increases quickly, for example, the first person bids 110 dollars and believes the painting is worth at this price. Now, the second person offers 120 dollars and the third person offers 130 dollars, and the price increases with ten dollar intervals, but when the price reaches a certain range, buyers feel that the value of the painting may not be in this price range. Willing to buy decreases and buyers no longer increase their bids with ten dollar intervals and do not overtake each other in bidding and the increments of buying bids become 5 dollars.
Buyers are willing to buy at worse and higher prices as long as a product is worth buying. This issue is also clearly seen in the financial markets, for example you can see the price of gold in the chart below.
According to the chart, the price of gold is increasing and you may be willing to buy several dollars more expensive. But where the price reaches its peak, no one is willing to enter into a purchase transaction at worse prices, and mentally, the traders think that there is no longer any value to buy at this price and they are not willing to pay more money, so we will see the turning point of the market at this price , where the desire to buy decreases and the first sale moves the price down, and on the other hand, because buyers are willing to buy at lower prices, the seller is forced to sell at lower prices.
Continuously, this flow of orders in the financial markets and stock market is being carried out based on the auction theory. It is necessary to remember that the price action steps have been fully explained by Mr. Zand in the price action training course, and you can access these videos completely free of charge. In Price Action, you can see the order flow and we want to explain the behind the scenes of order flow by means of volume trading. In addition to the price changes in a candle, we can also monitor the volume of orders, this way we understand what volume the buyer buys and what volume the seller is willing to sell.
It should be noted that as the movement steps become smaller, we see a decrease in the skewness coefficient or a decrease in the movement power.
In this picture, the price starts to move and climbs with certain steps and goes up until it reaches the price peak or overbought. After that, there is no previous desire to buy, and the price stuck into a range, and after that, the desire to sell created. In volume trading course, we can see behind the curtain of the candles, thanks to second level of data, also we can estimate better the increase in demand or supply and reach the turning points of the market. The amount of decrease of buy orders or increase of sell orders is possible by using data level 2, the data that helps us to find the overbought or oversold area. Those who are not equipped with level 2 data will find out about the change in market direction much later, either they have to wait for the formation of a powerful candlestick or wait for signals from lagging market indicators. But in Overflow, we see the flow of orders that make the candle, and practically before the candle closes, we get to know about it as soon as the flow of orders changes. This is the superiority of volume trading over other trading methods. Organizations and banks do their transactions using the volume trading method, and we also do our transactions using this method. Considering that Forex is a decentralized market, the volume of each candle is not visible in this market, so we use the centralized American futures market. So, if you intend to trade in the market, we recommend you to trade with the volume trading method because this method is the most principled trading method.
