In Marketprofile we see the movement of price as an auction between buyers and sellers negotiating value during the day, across time frames.
It’s important to understand whilst studying the concepts of Auction Market Theory that short-term sellers may be selling to long-term buyers or short-term buyers to long-term sellers. There is a Buyer and a Seller at every turn of the market and prices move depending on which trader shows more intent or a willingness to hit the bids or the offers.
If prices move higher then we say that buyers are in control and are aggressive and if they go down then sellers appear to be controlling/ aggressive.
Here is a simple strategy to use for trading the short-term moves. It is called a Failed Auction theory.
Most of the times, the first 60 minutes appear to be the time when the market is establishing value for the day and is referred to as the Initial Balance. This is especially the case in markets like ours at the NSE which do not confirm to 24-hour futures trading and hence knowing the first 60 minutes of activity becomes very important for a trader in the day time frame.
The Initial Balance or IB as the name would suggest is the first 60 minutes of the session where we saw 2 both buyers and Sellers fairly active in an equal measure or in a balance.
As markets do not always stay within the first 60 minutes of activity the whole day, the movements outside the initial balance often produce some amazing trading opportunities for all traders.
One such trading opportunity is what we called the Failed Auction.
This particular variant of the Failed Auction was popularized by a Market Profiler named Ray Barros
So what is the Failed Auction Theory all about?
Failed Auction Theory: A failure to stay outside the initial balance for more than 30 minutes (on one side), followed by a revisit inside the initial balance and an opposite move on the other side of the Initial Balance.
After a failed auction, the initial move is in the direction opposite to the one that failed, but the beauty of the theory as pointed by Ray Barros is that the market will revisit the failed auction zone in about 5-6 days in over 75 % of the cases.If it does not visit back in 5-6 days then the movement after the failed auction will continue for several weeks.
Let’s look at a chart to understand this :
In the chart above
a) The Initial balance is the Orange vertical line to the left and is the first hour traded range.
b) We had a failed auction when the market moved lower in the ‘G’ period but reversed immediately back into the Initial Balance.
c) The market continued the same day above the IB period and closed at the other extreme.
d) The market continues with the momentum of the failed auction higher in next 1-3 sessions
e) The failed auction often gets visited with days T+5 where T is the day of the failed auction.