NEW TECHNIQUES
What Is The Market Saying?
The Auction Market Theory
by Donald Jones
Thanks to the Internet, even when you are far removed from the floor of the exchange, you can still hear what the market is saying.
At some point, every trader benefits from a surprisingly fast, good trade. When that happens, should you take what you have and run, or should you hold out in hope of additional appreciation? How do you know what the market is telling you?
To answer that question, you need to know the theory behind the markets. This will help you to tie the myriad loose ends of market data together, organize them, and simplify your market analysis. The Auction Market Theory, which is based on observable facts, takes the entirety of market data and other information and compresses it into a set of assumptions and rules leading to consistent, intelligent trading strategies. The resulting structure helps you understand the migration of value and the market condition within which the value changes are taking place, enabling you to understand what the market is saying.
Value is the dominant variable in the markets, and it's driven by demand. Changes in value reveal that demand, and by analyzing a market's value path, you will be able to make reasonable trading decisions. In this article I will develop the theory necessary for you to get a clear picture of the structure of the general market and let that knowledge guide your analysis.
Figure 1: Swiss franc market profile. The price-time distribution is quasi bell-shaped. TPO volume peaks in the middle prices (6050 to 6040) and then trails off toward the upper and lower limits. There is very little support for trading at the highs and lows of the day.
...Continued in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.