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0:00 Most traders are taught to look at the market as patterns to be predicted. Head and shoulders, flags, indicators crossing. This mindset is the exact problem for most retail traders. Markets are not random, but they're also not just patterns either. They're auctions. Every single candle you see on your screen is the result of buyers and sellers negotiating price in real time. And auction market theory gives us a framework to better understand what phase that auction is in, who's in control, and how price is most likely to behave next. In this video, I'm going to break down auction market theory from the ground up. No jargon, no purely academic stuff. And we're going to cover
0:46 what auction market theory really is, the core phases of the auction, how to recognize each of these phases on the chart, and most importantly, how price behaves in each auction phase so you can stop guessing what price is going to do and start reacting to the behaviors. This is the same lens that professional traders use when they talk about the market being in balance versus imbalance. Fair value versus price discovery. And most importantly on certain days why price seems to trend cleanly while on other days it seems to just chop traders to death. So if you've ever asked why did that breakout fail or why does price keep ranging in that same area? but also why does my trading seem
1:31 to work really well on one day and then seemingly falls completely apart on the other? The answer is almost always market context and auction market theory is how we define that context. So instead of predicting where price is going to go next, we're going to focus on understanding what the market is trying to do right now and how to align our trades with it. So let's start with the foundation. Welcome to market auction theory 101. And let's talk about what auction market theory is and what it isn't. Okay, everybody. I want to make this class very basic and foundational for auction market theory. You don't need to be a mathematician to be able to understand these concepts. I
2:16 want to make them so everybody can grasp the fundamentals of the principles of our trading system. Okay? And it all starts with this, right? This is a normal distribution in statistics. You might be familiar with it as a a bell curve. And it is a fundamental principle that guides our trading in the system. And what does it mean? So in statistics, right, you see this fundamental principle that pans out where when you take any sample size of information, 70% will fall within the middle. Right? This is the peak of the bell curve and then you have outliers at the other
3:03 30% or 15% on each side. Okay, so we take this same principle of statistics and we apply it to the volume profile. Okay, so here's our normal distribution on the volume profile, right? We might be familiar with these as high volume nodes or high volume areas. This is volume per price. All right. So each one of these bars in this histogram is going to be a price level, right? So for example, let's say it's gold. This can be 4,000. This is going to be 3999. Right? This is 401. All right? And this is going to show you the volume of price at each price level.
3:49 Right? with the bigger bars being the most volume traded at that price level and the smaller bars being the least volume traded at price value. Okay, so we take this same concept of the normal distribution and now we flip it on its side and this now becomes our volume profile and this 70% this is our value area high and this is our value area low. Okay, so 70% of our trading, our volume is trading within this 70% area. This is also applied to the market profile which is timebased. Same concept. Okay, I'm going to show you how this applies to auction market theory in a second.
4:35 Right? So in auction market theory, we have two states of the market. We have balance and we [snorts] have imbalance. All right? Balance is where we're trading in a trading range. And this behavior is fractal. So it happens on all time frames. Currently this is the threeinut chart but you'll see this on every single time frame. Okay. This would be a balance area right where price is rotating. This would be an imbalance area where price is directional. And we see this market behavior pan out over and over. Okay. Let's add a volume profile to our chart. Okay. And now this isn't always perfect,
5:22 right? But you can see for example here, this is relatively good-looking profile, right? This is our distribution. We have our value area high and our value area low. This is 70% of our trading per our R our diagram is now taking place in this price area right so what happens in balance this is balance versus imbalance right these are the two states the market could be in per auction market theory imbalance this is where price is agreed upon and we tend to see rotational price action
6:08 And then we have imbalance where one side takes over. In this case, it's the bulls and we get trending price behavior. Right? So the whole key of auction market theory is deciding which of the market conditions are we in. Are we in imbalance or versus balance? And this all depends on the time frame you're trading. You could be on balance on a much higher time frame but imbalance on a much lower time frame. Right? So that's why we look for multi-time frame alignment. But in this video, we're not going to go that deep. All right. I just wanted you to understand these basic concepts. Okay. So here again is our value area. Here's our distribution. Most of our volume is taking place within these
6:53 lines, right? And you can see price rotating in this value area until it breaks out into price discovery. And what is it going to discover? It's going to discover a new balance area at which point it moves to a new balance area. Right? So in the VWAP wave system, we have setups that speak to each market condition. Right? So for example, right? If we're in a balanced market, we have what's known as the fade value area extreme. So this is our value area and we're looking to fade the market at the extremes of the value area.
7:39 Okay, those are our trades. And where do we fade it to? Generally back to the middle or the point of control. This is shifted a bit because it's later in the day. But if we were to do a fixed range profile, let's do a fixed range profile. All right, you can see it much clearer, right? And we're going to trade it back to the point of control, which is right there. That's the highest and most highest volume area and the highest most popular price point, right? So, we fade these areas back to the point of control. That's the trade, right? Until we leave, we break out of value, right? Then we trade the pullbacks in the direction of the price discovery. That's our price discovery
8:26 continuation long. Those are the two core fundamental concept trades of the VWAP wave system based on these auction market theory price behaviors. You need to decide which market condition we're in. Then you trade the particular and specific setup that's necessary for that market condition. We do have two other core setups. We're not going to go into those today. They're a little more advanced um and nuance. They have nuances to them uh that are a little different than the first two core setups. But uh think of setup one price discovery continuation for imbalance. Core setup number two, fade value or extreme for a balanced market. We'll keep it simple for this video. Okay. Okay, so now we're going to take it a step further and let's move off of
9:14 this chart and we're going to talk about some principles as it relates to the behavior in one or two of these market states. Okay, first we're going to talk about all right, here's our distribution. Here's our value area high. Here's our value area low. And let's say this is our point of control. Okay. So, what happens in a balance area? All right. If we're trading down to the value area low, right? We're expecting this to hold because we're in balance. So, we're fading value area extremes. If we cannot break out and we reject at the value area low, we're going to expect to go to
9:59 the point of control. All right. Now, once we get to the point of control, we're going to look to see if we can break through the point of control or we reject at the point of control. If we reject at the point of control, we're going to expect price to go back to the recent side of value. All right. Now, at the value area low, we're going to see if we can break out of this value area into price discovery, but we're not going to we're going to assume it's going to hold. Our setup is fade, value or extremes, right? So, we're going to go long assuming if a price does not break out into imbalance or price discovery, our principle says we're going to come back to the point of control. Now, this time, if we break the point of control, we're
10:46 going to price expect price to go to the other side of value, right? We call this the coast to coast trade. One side of value to the other. At which point if we can't break into price discovery where are we going to go back to the point of control break through point of control right and this goes on at fin item in a balance area until which point we can break out into price discovery. Right? So we're trading along in balance until this happens. Right? We finally break out. We'd leave the balance area and now we're going into price discovery. And what are we looking to discover?
11:34 A new balance area. At which point this behavior will repeat until we break out and leave in search of a new balance area. And this is just what the market and the auction is continually in. It's in this perpetual state of balance into price discovery into balance into price discovery over and over again on all time frames. Right? And that's the lens at which we look at the auction behavior. Okay? Once you understand these core principles of auction market theory, which are then the core principles of the VWAP wave system, which you'll find in the VWAP wave course setup guide, all of the principles, right? you're going to start looking through the market, looking at the market through a much different lens, right? With much
12:20 different reactions to key levels, right? Not just always looking for breakouts or always looking for phase fades. You're going to have specific trade setups depending on the market condition and at which time frame you're looking at. Okay? You can see this exact framework playing out on the higher time frame. Right. So, here is our hourly chart on the ES, the S&P 500. Right. And what can you see here? Right. This is the exact chart that I just showed you. Balance area, price discovery, new balance area, continuation of the balance area.
13:08 Right? So balance price discovery new balance new balance price discovery new balance area right so the market is always just searching for these new balance areas of which it will range it will rotate the business the market will do business and once it's done doing business and that's balance area it will go in search of a new balance area right so these are session volume profiles on just every single day on the S&P 500. And this is just how the market plays out. This is auction market theory. This is the auction trading in in real time and panning out. And this is how we understand what price is doing and where
13:53 it's doing it, where it's doing business, right? You take this away, you just have candlesticks, right? We candlesticks are important. Price action is very important. Price action is a big part of what we do. But we believe it's incomplete. Once you add volume to the chart because we have three major pieces of information that the market gives us. It gives us time, price and volume. Price action traders just look at price and time, right? Once you add volume to the mix. Now the beautiful thing about volume is it takes out the element of time, right? We can see how much volume is done at any particular level in general. So that adds a whole another interesting aspect to the market. Now we've taken the same concept that we see on the volume profile and we've also
14:38 adapted it to the VWAP. So now we we use the volume profile heavily in the VWAP wave system, but we also have this next level of auction tool in the volume weighted average price, the VWAP, right? Except for the point of control is the VWAP itself. The value area high is going to be a one standard deviation to the upside and the value area low is going to be a one standard deviation to the downside. Right? So, we're going to add our VWAP to the chart. And now we have a lens of balance versus price discovery. At which point, valueary high, fade value or extreme, fade value extreme. Now, we have price discovery to the downside. So where we're fading the
15:24 upper side of value, we're going short up here. We're going long down here because it's balanced right here, right? Because when we're in the standard dev, the value area high value area low, we fade the extremes. Once we break below and are clearly now in price discovery because we're trading below the standard deviation band, we now trade in the direction of the price discovery and we look to get longs at the pullbacks to the deviation band. Right? At which point we broke back into value area high VWAP couldn't get past the point of control. What happens if we can't get by the point of control? We go to the recent side of value, right? The same principles that we I just spoke about
16:10 that play out in auction market theory on the volume profile now apply to the VWAP and its standard deviations on price. Why do they apply so similarly to the VWAP with standard deviations as they do to the volume profile? Because they're both based on statistics, right? A one standard deviation on price is a value area high and low based on volume just like the volume profile. So this is what we'll use on a intraday chart. This is the GlobeEx VWAP, right? So the VWAP is anchored to the 6 PM standard time, right? And you'll see these levels, guys, playing out over and over and over again, right?
16:57 I get I get uh you know on social media people are always like giving me a hard time. They're like this is so hindsight. Well, it's hindsight because I'm showing you charts where they work all the time, but we trade these live every single day, right? It looks so good in hindsight because it looks so good live as well. We see these areas coming a mile away. These are high probability levels. To take this a step further, we know for a fact that institutional level and hedge fund level algorithms trade VWAP and standard deviations on price. How do we know that? Well, we've had market makers and hedge fund managers tell us this, right? We we know they're using VWAP to build institutional level positions. We know their algorithms are
17:43 programmed around VWAP and standard deviation. So, why wouldn't we use it? Right? Very powerful stuff. So I did want to keep this really top level today. Uh we did explain auction market theory and how we use those how those principles work. How price behaves in balance and imbalance or fair value versus price discovery. How we can expect price to behave in each of those market conditions. And then we took it a step further. How we can use specific trading setups in each of those market conditions. How to recognize the market conditions. And then lastly, what tools we can use like the volume profile and the VWAP to find those setups and trade them in real time. So, thanks for joining this
18:30 video. I hope this video really helped you understand a little better the auction behind the candlesticks, but more importantly, key takeaways on how to use it to trade the markets yourself using these principles. Please be sure to subscribe to the channel, like this video to support us, and uh join us in the free Discord. There's a link to that in the description of this video. Grab my free View app course setup guide and we'll join my live sessions and we'll see you in the next
