How do auction markets work?

[BobbiDigital]

Often times I read posts saying most traders don't understand how markets work. Here is what I know or think I know about auction markets:

1. Price goes up and down (range, trend, expand, chop, or consolidate)
2. Fair value is somewhere near the middle of a given timeframes swing H and swing L
3. Most volume occurs near fair value in the middle forming a bell curve
4. The 'winning side' pushes price from fair value to extreme H or L's until volume drys up

Fractals - why then does price move in fractals? My only thought is trader psychology i.e. history repeating itself given there are very few S/R levels responsible for PA.

 

[dbphoenix]

Quote from BobbiDigital:

Often times I read posts saying most traders don't understand how markets work. Here is what I know or think I know about auction markets:

1. Price goes up and down (range, trend, expand, chop, or consolidate)
2. Fair value is somewhere near the middle of a given timeframes swing H and swing L
3. Most volume occurs near fair value in the middle forming a bell curve
4. The 'winning side' pushes price from fair value to extreme H or L's until volume drys up

Try this:

• An auction market's structure is continuously evolving, being revalued; future price levels are not predictable
  
  An auction market is in one of two conditions: balancing or trending.
  
  Traders seek value; value is price over time; price is arrived at by negotiation between buyers and sellers.
  
  Change in demand drives change in price.
  
  One can expect to find support where the most substantial buying has occurred in the past and resistance where the most substantial selling has occurred.

Quote from BobbiDigital:
Fractals - why then does price move in fractals? My only thought is trader psychology i.e. history repeating itself given there are very few S/R levels responsible for PA.

They don't. So that's at least one thing you don't have to be concerned about

 

[ammo]

Quote from BobbiDigital:


Fractals - why then does price move in fractals? My only thought is trader psychology i.e. history repeating itself given there are very few S/R levels responsible for PA.

your bell curve is a fractal, the high and low for a year and the meat in the middle is a 1 year fractal,fractal is a relative term,its a segment of the market

 

[BobbiDigital]

DB & ammo,

Do you believe the way in which price builds on itself affects the likelihood of retracement (%), reversal, or continuation on a given time frame? Or in your view, is it more about how bigger players respond at key levels no matter if price went straight up or moved in perfect waves?

 

[dbphoenix]

Quote from BobbiDigital:

DB & ammo,

Do you believe the way in which price builds on itself affects the likelihood of retracement (%), reversal, or continuation on a given time frame? Or in your view, is it more about how bigger players respond at key levels no matter if price went straight up or moved in perfect waves?

The probabilities regarding retracements, reversals, and breakouts are determined by support and resistance as well as the balance between demand and supply. If price moves parabolically, a reversal is more likely to be successful since there's so little support underneath the price. If it instead moves in "waves", perfect or otherwise, more trading is taking place on the way up and more potential support is available on the way down. This won't stop price from falling if that's going to be the way of it, but the fall will be more stepped. Today's NQ provided an excellent example.

 

[abattia]

Quote from BobbiDigital:

Often times I read posts saying most traders don't understand how markets work. ...

http://www.amazon.com/books/dp/0470039094

http://www.amazon.com/Trading-Excha...words=market+microstructure+for+practitioners

 

[dbphoenix]

 

[abattia]

Quote from dbphoenix:

LOL ...
... however, while of course I understand you don't mean to imply there’s an exact parallel between vegetable selling (“Five for a pound! Five for a pound!”) and trading securities on an “electronic” exchange, IMO the analogy can be more obscuring than helpful if the differences are not appreciated.
As far as I’m aware (vegetable selling not being now, nor having even been, my area of expertise):
- There’s no National Best Bid and Offer for selling carrots (you can sell them at whatever price you can get away with, regardless of what other transactions are going on around you).
- One carrot IS different from another carrot (so pricing differences between carrots may be justified).
- A seller of carrots doesn’t generally buy his/her carrots from exactly the same crowd that he/she might sell them to.
- And I have never seen a line of people SELLING carrots, where each salesperson waits for the sales person in front of them to sell before then trying to sell their carrots at the same price.
- And there is no minimum price increment for selling carrots (as you can always offer multiple numbers of carrots for any price, which means the unit price could be anything ...)
- And so on …

Perhaps the analogy is closer if you imagine a single vegetable stall where EVERYONE has to buy their carrots (i.e. there is nowhere else to buy carrots), and where each vegetable seller HAS to sell their carrots (i.e. they can't sell them elsewhere), and where sales can only occur at whatever are the best bid and offer at any point in time, and where a strict queueing system is operated at each price level?

... and perhaps this analogy above (i.e. a single carrot venue) would work better for futures markets than it would for US equity markets (many venues)?

 

[dbphoenix]

Not an exact parallel. But there must be a buyer and there must be a seller and they must agree on a price before a transaction takes place. Otherwise, there is no transaction and no guide to value.

Won't satisfy everyone, but keeping this image in mind helps me stay on the straight and narrow and out of the weeds.

 

[BobbiDigital]

My follow up question to how do markets work is related to observing big players, tracking their footprints. Am I correct in assuming this is nothing more than watching swing highs and lows put in near S/R? The churning that may occur enables them to accumulate or distribute shares by creating confusion with bullish and/or bearish patterns to influence herd beliefs?

BD