Auction Market Theory Trading Strategies for Balanced and Trending Markets

What Is Auction Market Theory?

So, what is auction market theory? A market is viewed as a continuous two-way auction where buyers and sellers negotiate. And the movement of price becomes a search for levels where both parties would transact.

Such a search is price discovery, and it creates two clear states. When the auction finds the level satisfying both sides, price activity concentrates around it, and price rotates inside it. This is balance. When one side is no longer satisfied, price starts moving in one direction, searching for a level where trading can resume. This is imbalance.

A quick clarification before going further as the word auction has another meaning. Exchanges operate opening and closing auctions: formal call auctions when orders are aggregated and executed against each other at a single price maximizing executable volume. They are fixed-time matching procedures. Auction Market Theory is about something different, about the continuous double auction taking place between such events.

The vocabulary comes from J. Peter Steidlmayer's Market Profile work at the Chicago Board of Trade in the 1980s, which is why the terms are borrowed from futures markets.

How to Identify Balance and Imbalance

The difference is observable rather than a matter of opinion, which makes it useful.

Overlapping Ranges and Two-Sided Rotation

Balance displays two characteristics. First, the ranges of successive sessions overlap significantly. Second, inside each session price rotates, moves up, meets sellers, reverses, meets buyers, and reverses again.

Two-sided rotation is the important element to pay attention to. Both parties show up at known prices, neither can push the market away, and each probe towards an extreme gets answered.

Directional Expansion and Value Migration

Imbalance shows the opposite. The range expands beyond what it was before without returning, and it means directional expansion. Each probe in the direction of expansion gets followed.

Another indication of imbalance is the development of a new trading area away from the old one. Price stops concentrating at the old level and builds a new concentration area in one direction, session after session.

Expansion on its own can be a single spike failing to develop further; expansion followed by value migration is what separates a trend from a spike.

Transitions Between Market States

Markets don't announce a change in state, and the transitions between them are where most money is lost.

• Balance turning into imbalance. Range expansion holds, rotation does not happen and price activity builds up outside the old area.

• Imbalance turning into balance. Range expansion slows, ranges start to overlap again, and rotation begins.

Be frank about the limitation. A transition is only obvious upon completion, and any live assessment of it is provisional. You either wait for a transition to become unambiguous and lose most of it, or you act on something that may never happen. There is no way around the trade-off, and treating the signals above as confirmation instead of evidence is the most costly mistake you can make.

Defining the Value Area Before Choosing a Strategy

The framework needs a quantified representation of the level where activity concentrates, and it's the value area: a certain band containing roughly 70% of a session's price activity. There are three levels coming out of it.

• Value area high. The upper border of the band.

• Value area low. The lower border.

• Point of control. The single price with the most activity, usually located within the band rather than at its centre.

And here is the crucial difference. This is not a regular range. A range is defined by extremes, the highest and lowest price reached, while this band is defined by distribution, by the price level where most of the activity takes place. Two sessions can have the same high and low and have their activity distributed fifty points apart.

And here are two practical considerations that cause disagreements between traders on the same asset.

1. Time-based and volume-based profiles are different. The former measures the number of periods price was at certain levels, the latter measures the actual activity there. Price can be traded for many periods with little activity, or for a single one with tremendous activity, and therefore both types of profiles will place the point of control at different prices. Pick one and be specific about which you use.

2. The 70% level is a convention, not a law. It's close to one standard deviation of a normal distribution, but price distributions are non-normal and most platforms allow setting a 68%, 70% or 80% level. Two traders can draw different boundaries from the same data.

Price Acceptance vs Price Rejection

With the boundaries established, the question is what happens when price crosses them. There are two interpretations, and they lead to opposite decisions.

Price acceptance means price crosses the boundary and remains there long enough to create a new distribution. The old value area is superseded now. Price rejection means price crosses the boundary but returns, leaving very little activity behind.

The truth is: both are valid interpretations backed by observations, not indications of intent. You cannot spot price acceptance as it happens, only afterwards when a sufficient amount of activity accumulates to declare a certain outcome. A break that looked like acceptance for twenty minutes and then failed was never acceptance. Use the classification as an input for a decision, not an instruction to trade, just as with any indicator, a point covered in this piece on trade signals and how to use them.

Choosing a Strategy for the Current Market State

Almost everything in auction theory trading boils down to the following single decision, made beforehand.

• Balanced market, price rejection at the boundaries. Trade the return into the range. Probes get answered, and extremes are the places with the best chances of a rotation.

• Imbalanced market, price acceptance beyond the boundary. Trade continuation. Probes get followed, and fading them means standing in front of the expansion.

• Unclear state. Do not trade. This is a legitimate choice and the most often skipped one.

Applied the wrong way round, each of them leads to a specific type of loss. Fading extremes in the trending market creates a series of small wins and one large loss. Buying breakouts in a balanced market generates a constant flow of small losses as every probe rotates back. Both feel like bad luck and are a state misdiagnosis.

Trading a Return into the Range

A strategy based on a balanced market, with all the prerequisites listed beforehand.

1. First, check the balance: the existence of overlapping session ranges and clear two-sided rotation, not just calmness of the market.

2. Wait until price reaches the value area high or the value area low, or goes just beyond it.

3. Demand the evidence of price rejection: a return inside on a completed lower-timeframe candle, not a wick.

4. Establish invalidation at a price beyond the probe's extreme, and aim for the point of control.

5. Cancel if price starts to concentrate outside the band. It means the acceptance took place, and the premise changed.

Aiming for the objective near the point of control is the better choice because that is where activity concentrated, so it tends to attract rotation. The far boundary sits further away and asks more from the range.

For more detailed mechanics of handling such turns, see this piece on reversal and pullback trading and how to read swings on charts.

Trading Continuation Beyond the Value Area

This is an imbalanced market strategy, and this one is more difficult to apply because confirmation and price are in conflict.

1. First, confirm the imbalance: price expanded beyond the previous area without rotating back.

2. Wait for acceptance, not the break. The activity must accumulate beyond the previous area over multiple periods without returning inside.

3. Trade on continuation, or on a pullback that holds the old boundary from the outside, which is the cleaner of the two.

4. Place invalidation back inside the prior value area. A return inside means the expansion was rejected.

5. Cancel if price re-enters the prior area and starts rotating. The state turned balanced.

This is an inevitable conflict. Waiting for acceptance means entering later and farther from the boundary, thus widening the distance to the invalidation level. Entering early means acting before the evidence exists, and there is no setting that can solve this, only the decision on which type of error you prefer.

Balanced and Trending Market Examples

Two theoretical sessions on an index with invented levels, as examples of the structure rather than of real trading.

Balanced session. The price range is 4,480 to 4,520, a forty-point spread. The value area low is 4,492, the value area high is 4,512, and the point of control is 4,502. Price moves up to 4,520, down to 4,484, and up to 4,510: two-sided rotation. The next range is from 4,486 to 4,518, with almost complete overlap. It's a balanced market, and a probe towards 4,512 with rejection is aimed at 4,502, with invalidation beyond the probe's extreme.

Trending session. Again, starting with the same old area, price opens at 4,515 and continues upward, moving between 4,510 and 4,575. Then a new band forms, between 4,538 and 4,566, with the point of control at 4,552. See what has happened: it does not overlap the old band at all, and the concentration of activity has moved fifty points forward. A new trading area develops away from the old one, which signals imbalance, not just a single wide range. The play is continuation, with invalidation at a return below 4,512, the previous value area high.

These two examples show what acceptance and rejection look like in practice. A move to 4,528 that returns below 4,512 within one period is rejection. A move above 4,512 that spends three periods building between 4,515 and 4,530 without returning is acceptance. The same levels are involved; the difference between them is the build-up of activity there.

Applying the Framework to Pocket Option Chart Analysis

Auction market theory trading does not require a profiling tool. The observations underlying the strategy can be done on a regular chart if you know what to look for.

1. Identify the high and low of the previous session, and the area where price spent most of the time. It is a rough approximation of the band, but good enough.

2. Check the overlap of the last several sessions. Overlap means a balanced market; stepping in one direction indicates imbalance.

3. Classify the market state first, before looking for an entry, so that the setup won't determine the market state.

4. Draw the invalidation level first, based on the structure, not on a fixed distance.

5. Log the market state you've diagnosed and the result. It'll help you see which market state you're bad at diagnosing, which is much more useful than the win rate.

This last step is the one that compounds. Most traders using an auction market theory strategy find that they are good at detecting one state and bad at the other, and that is an additional piece of information beyond a pure profitability rate. Incorporating it into a documented process is an important part of building a realistic trading plan.

Conclusion

This framework does not predict where price will go. Instead, it helps you answer one crucial question first: is the market currently rotating or expanding?

Everything else follows from it. Define the value area according to where price activity concentrates, not according to the extremes. Decide whether your profile is time-based or volume-based, as there is a difference between the two. Consider a break as acceptance only after the activity accumulated beyond it, and as rejection only if price returned inside. Align your strategy with the state of the market: rotation when the market is balanced, continuation if it's not, no position if it's unclear. Then treat every one of those reads as provisional, as each describes something that has already happened rather than what will happen next.

Disclaimer: This article is for informational and educational purposes only and does not serve as investment advice or endorsement of a particular type of trading strategy. The price levels and sessions mentioned in this article are hypothetical and used to demonstrate structure without implying actual market conditions. This material makes no claim as to profitability or success rate of this approach. Previous price action cannot predict future moves. Trading is associated with high risks of financial losses.