Auction Market Theory Explained

Alexander Voigt

By Alexander Voigt

Last Updated: July 01, 2023

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Auction Market Theory is the main component of order flow trading. Applying the concepts of auction market theory to your market analysis helps to determine good market entry points.

Key Takeaways

  • Auction Market Theory is a theoretical framework that explains the principles of auction processes, supply and demand dynamics, and price discovery in the financial markets.
  • Essential tools such as Market Profile & Volume Profile help traders identify fair value & trading opportunities in the financial markets.
  • Strategies like mean reversion, trend trading & order flow analysis help traders capitalize on market fluctuations while managing risk effectively.

auction market theory

What Is Auction Market Theory (AMT)

Auction Market Theory is based on the theory that financial markets move due to buyer and seller aggression imbalances. Market events, such as earnings announcements, FED policy updates, or general market melt-down or hype, can trigger those imbalances. AMT further assumes that the imbalance disappears once the market reaches the price point reflecting an underlying asset’s fair value.

An imbalance isn’t something new. You can also find it on the housing market and many other cases. You surely know the term buyer market or seller market.

A buyer market is when supply overweights. In a buyer market, more people are willing to sell something, and this supply hits the market with just a few market participants willing to buy. This gives room for negotiations and lets the prices fall.

A seller market is when demand overweights. In a seller market, more people are willing to buy something, and the demand hits the market with just a few market participants willing to sell. This gives room for price increases.

When buyer demand and seller supply are on a similar level, the market is at fair value.

The Role of Market Profile

Market Profile, a charting tool developed by Peter Steidlmayer in the early 1980s, plots the price distribution over time and provides insight into the market dynamics.

It consists of essential elements such as Price, Time, and Volume, which, when combined, help traders identify patterns of collective behavior and price fluctuations over time.

auction market theory

In a balanced market, the fair value appears as a Gaussian bell-shaped curve, illustrating the area where the majority of trading activity occurs, and most traders agree on the fair value of an asset.

My article what is market profile explains the components in more detail with examples, the importance of the point of control, and more.

Why Is It Important to Understand Auction Market Theory

Understanding Auction Market Theory helps traders to understand the concept of supply and demand better. It helps to avoid the fear of missing out, and it prevents you from blindly entering a trade at the highest price and shorting underlying assets at the lowest price.

You can interpret the Auction Market Theory like a rubberband. If you take it between your fingers and pull the rubber band to one side, this is where its oversold or overbought condition is met. Once you release it, the band returns to the point of fair value. The fair value remains until something happens again that kicks in dynamics again.

Auction Market Theory Tools

Determining oversold, overbought and fair balanced markets by looking at the charts and manually considering the trading volume is complicated.

Trading tools can do in real-time what you must do by investing a long time. Unfortunately, most analysis tools cost a subscription, but as long the price stands in a reasonable ratio to the expected outcome, it’s worth considering subscribing.

Futures Trading Platforms: The Auction Market Theory is frequently used by futures traders trading futures contracts. Various future trading platforms leading futures brokers have fully integrated AMT tools.

TrendSpider: TrendSpider is primarily a technical analysis software, but they integrated a Volume by Price indicator. You can use it by selecting the period you want to analyze on the chart, and you will see the Point of Control and the volume distribution shaping the Gaussian bell curve.

auction market theory example nvda

Wrap Up

Auction Market Theory understands the financial market as an auction, where supply and demand cause pricing to either stay at or leave the fair price level to the up or downside.

The Volume Profile bell-shaped curves help identify the value area, which represents 1 standard deviation from the mean.

Overall, financial markets stay within a tight range around the fair value 80 percent of the time, while at about 20 percent, they leave the fair value to the up or downside.

AMT is most effective for day traders combined with day trading indicators or candlestick patterns.


What is the volume profile auction market theory?

The Volume Profile Auction Market Theory represents the fair value area (the so-called point of control, POC), where most buyers and sellers agree on the price, resulting in the focal point of market activity.

What is Jim Dalton auction market theory?

Jim F. Dalton is a book author who published Markets in Profile in 2007, covering the auction market theory. The book details behavioral finance, philosophical frameworks and neuroeconomics, resulting in the unified theory of how markets work.

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About the Author

Alexander Voigt is the founder of He has over 20 years of experience analyzing and trading the financial markets and has been quoted on leading financial websites such as Business Insider, Investors, Capital and Forbes.