Auction Market Theory, explained in plain English
The core ideas
- The market's job is to facilitate trade. Price moves to wherever it can get the most business done.
- Balance: buyers and sellers agree on value, so price rotates inside a range.
- Imbalance: one side takes control and price trends until it finds a new area of value.
- Fair and unfair prices: prices with lots of volume are accepted as fair. Prices with little volume are rejected quickly.
How it shows up on a chart
You can see the auction with volume profile. The point of control and value area show where the market agreed on price. VWAP shows the average position of everyone in the auction. When price leaves value with conviction, that's imbalance, and that's where trends start.
How I use it in my trading
Auction Market Theory is one of the foundations of my approach, alongside Dow Theory and the Wyckoff Method. I want to trade when the market's out of balance and trending, then join the move on a pullback to value. In a balanced, choppy market I'm much more careful.
Common questions
Is market auction theory the same as Auction Market Theory?
Yes. People use both names. The usual term is Auction Market Theory, often shortened to AMT.
Who came up with Auction Market Theory?
It grew out of the work of J. Peter Steidlmayer at the Chicago Board of Trade in the 1980s, which also gave us market profile.
How does Auction Market Theory relate to volume profile?
Volume profile is the main way traders see the auction. It shows where value was accepted (high volume) and rejected (low volume).
Can I use Auction Market Theory in forex?
Yes. The ideas of balance, imbalance and fair value apply to forex and gold, using tick volume or futures volume for the profile.