all right guys what's going on this is going to be the first part of our order flow roadmap series we're going to be talking about the auction Market Theory so after learning this Theory it's going to be hard to just consider it a theory it's going to seem like the most practical or pragmatic approach to markets uh it just completely makes sense it boils everything down to the Bare Bones you know the interaction between buyers and sellers in an auction right to um you know to identify what the fair value of an asset will be okay the purpose of a market right a a market is is a place where this exchange happens between buyers and sellers and the purpose is to identify what the fair value of an asset will be so this is the auction Market Theory 101 and I'm going to try to keep this short and sweet and strictly to the point so understanding the auction all right so trading is very much like an auction right the market has two jobs okay so obviously it has to facilitate trade all right so it needs to provide a place where buyers and sellers can interact rather come together and where buyers can submit competitive bids and sellers can submit competitive offers at the same time all right and again this helps price find its fair value all right and fair value is a concept that we are going to be talking a lot about um you'll see me talk up you know about the fair value area all right on something like a volume profile we'll talk about the value area high and the value area low and hopefully these will these areas will now make a bit more sense so when prices are too low they're below fair value and demand will press them upward okay on the other hand when prices are above their fair value they will come back down and you have to think about this fair value as the mean okay so uh when prices are above value they come back down and when they're below value they rise up okay and this is um this is through the the interaction between essentially this is supply and demand right so this is um the interaction between buyers and sellers to determine the fair value of an asset and this is based on supply and demand so you have to think of an auction okay so in this case think of the auctioneer so the person heading the auction all right coordinating the auction whatever and so forth um henceforth so forth it sounds funny uh so the auctioneer will start the auction by naming one price if at that price he doesn't get a response what does he do okay he will initially lower the price of whatever he is auctioning all right and what happens when he lowers it right the room starts to get a little louder he basically finds by lowering his price where that sweet spot is okay essentially demand picks up all right and then the room does the rest of the job okay so one bidder after the next is trying to outbid the other and what happens the price it goes up okay so price initially drops to find buyers okay and then it rises to find sellers okay so when price Rises what happens in an auction okay the auctioneer will continue to you know yell out a number let's say starts off it you know do I have 50 do I have 50 okay no one buys initially he drops it down to do I have 45 all right no one buys do I have 40. okay and then he gets some response from the room so what does he do okay do I have 41 buy or start bidding it up okay do I have 42 do I have 43 suddenly what do you know all right the initial price started off at 50 went down to 40 and then now it's been up all the way to you know just random 60 60 right so he'll keep Rising okay rather raising the price okay until it exceeds where the demand is all right so it'll reach a point in which it is above fair value it's above the value area okay and this is just consider this as if it's expensive so what will happen it'll stall out right when it stalls out there'll be in this case consider like excess Supply and the price will drop to meet the demand again all right what happens price might drop a little bit at first by not really find any demand if I drop a little bit more and then the same pattern will occur the room will rise up again you'll hear volume in the room I want you to think about volume as the responsiveness on part of buyers so just think of it that way when you're Imagining the market volume increasing imagine the volume in the room increasing as the price becomes more attractive right so price will rise and fall seeking out buyers and sellers okay just as in an auction again volume will confirm interest and acceptance of prices so acceptance is going to be important we're going to talk about acceptance you're going to hear me refer to the concept of acceptance rather uh when we look at certain things like footprint charts order flow charts volume charts volume profile and when we're talking in regards to or rather about devalue areas right the value area high and low being broken okay whether or not something is accepted or not okay meaning buyers step in and continue to push it up all right so volume comes in so typically rather when I'm referring to acceptance more often than not what I'm referring to is an increase in volume to really stand behind the move all right and the opposite of that would be when price comes up through an area and there's a failed auction okay and say price goes above the value area high for example and you know buyers don't continue to prop it up and and it's a failed auction because it'll eventually come back down into the uh into the range right so in a second we're going to talk about how this value area Works within a range right just trying to keep this as simple as possible so this is a basic um very basic drawing that I did okay and this is what it looks like all right imagine this being a volume profile okay and this being price all right now if you notice this looks sort of like a evenly distributed bell curve right so if you look at a bell curve write the one standard deviation would be where 68. 8 percent of the values were within rather 68.
8 percent of the values okay took place between one standard deviation of the average all right so that's what's considered one standard deviation in a um in a normal distribution so this is kind of similar to how we set up our value area when we're making setting calibrating the settings for our volume profile so we'll put it around 68 or 70 percent and what it will do to include where 70 percent or rather will highlight where 70 percent of the trading volume took place or in the case of a few 68 right now remember it's not a normal distribution it doesn't always look very balanced but you know in the case of just for this example we're looking at a very balanced volume profile right so just imagine this is very balanced this is very even distribution and these lines right here are what would be considered the extremes of one standard deviation okay so imagine this is the average okay and so this is I believe this would be uh 34 to the top 34. 4 and then 34.
