Auction market theory

What it is

Auction market theory treats a market as a continuous two-way auction searching for value. It came out of J. Peter Steidlmayer's work at the Chicago Board of Trade in the 1980s and was set out in James Dalton's book Mind Over Markets.

Most of the time the market is in balance: buyers and sellers agree on value and price rotates in a range. When one side takes control, the market moves into imbalance and travels until it finds a new area where both sides trade again. Short-term traders keep price rotating; 'other-timeframe' participants (funds and larger players) drive the directional moves.

A few words come up constantly. Initiative activity is buying above value or selling below it, pushing into new prices; responsive activity is buying below value or selling above it, fading back to value. Acceptance is time and volume building at new prices; rejection is a quick return. Excess is a sharp tail where price went too far and was pushed back. A poor high or low is an extreme that ended flat and heavily traded, with no tail, and is often revisited (an 'unfinished auction').

How to spot it

• Balance: overlapping days, price rotating between the same edges.
• Imbalance: price leaving the range and not coming back into it.
• Excess: a long tail at the high or low of a session. Poor high or low: a flat, blunt extreme.

How to use it

• In balance, fade the edges back towards the middle. In imbalance, trade with the move.
• Treat a break of a range as real only when price is accepted beyond it, not on the first poke.
• Use poor highs and lows as targets; excess as a strong level that's less likely to be revisited soon.

Common mistakes

• Fading a range edge when the market has clearly gone into imbalance.
• Treating it as a signal generator; it's a way of reading context.

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