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Market Auction Theory - backwards?
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Market Auction Theory - backwards?

  #1 (permalink)
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Market Auction Theory - backwards?

I'm a fan of auction theory as it's applied to the market but there's one thing that always irks me.

Not that this thing is going to make any difference to the way it's applied but....

If the market trades around a range of prices for a while, this is known as price acceptance, fair prices or an area where buyers and sellers agree that the current prices represent value.

The thing is - that to me is backwards. If buyers are buying, then think it's a good price to buy (cheap), if sellers are selling they think it's expensive. So aren't areas like this the place where buyers and sellers disagree the most?

Similarly, price rejection areas where we don't trade much. Say we move down to a price and then swiftly back up - isn't that really buyers and sellers agreeing on value. Buyers think it got too cheap so they started buying, sellers thought the same, so they stopped selling.

Is it just me that thinks like this?

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DionysusToast View Post
I'm a fan of auction theory as it's applied to the market but there's one thing that always irks me.

Not that this thing is going to make any difference to the way it's applied but....

If the market trades around a range of prices for a while, this is known as price acceptance, fair prices or an area where buyers and sellers agree that the current prices represent value.

The thing is - that to me is backwards. If buyers are buying, then think it's a good price to buy (cheap), if sellers are selling they think it's expensive. So aren't areas like this the place where buyers and sellers disagree the most?

Similarly, price rejection areas where we don't trade much. Say we move down to a price and then swiftly back up - isn't that really buyers and sellers agreeing on value. Buyers think it got too cheap so they started buying, sellers thought the same, so they stopped selling.

Is it just me that thinks like this?

Interesting idea, and as much as I sit here and try to figure out a way to refute it, I can't. Your argument seems to make sense.

My gut sais the answer lies in the way the OTF and day time frame interact with each other, and the size of the acceptance areas. OTF being more active with responsive activity on the outside of broader acceptance ranges. In other words, they each agree that the outer limits of balance offer good value. In the middle however is less easy to explain.

On the other hand I have absolutely no counter argument for your rejection actually being acceptance argument

It's been a 12 hour trading day and time to get some shut eye. Will go sleep on this

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It is not just you DT, but there is a straightforward way to reconcile this seeming paradox.

Agreeing on value must be true. After all, two parties are involved in the transaction and assuming neither is coerced, they each individually make the decision to transact.

But while they agree on value, as shown above, what they disagree on, assuming an outright speculation on both sides, is the future direction of the instrument.

One party happily buys at 500 (though he of course would be okay buying lower most likely), because he sees potential for appreciation. The counterparty happily sells at 500, having either realized a profit and seeing little potential for further appreciation, or selling short and seeing potential for downside.

So, value means the buyer and seller agree on a price, but chances are that they disagree on the prospects for the future.

This reasoning is no huge revelation, but it really is that simple.

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I think the term 'range' has different meaning depending on which time-frame we're observing. If a multi day/week range is visible on say a 4H chart, I think it represents a void of concrete information and the extreme prices attract size in both directions. If we're looking at an intraday range/chop I think it represents a few things; large traders have either completed their orders or are waiting for a better price, profit taking by all time-frames, and wrong/contrarian traders adding to their losing positions or taking another crack at it.

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They don't agree at any price. That's why they're called 'buyers' and 'sellers'. The paradox exists because the underlying concept of 'agreeing a value' is invalid.

The only dominant price areas of interest from a volume perspective are where there is maximal trading over time at a price, or at price extremes producing maximum capitulation of one side or the other when there is maximal trading at a time.

There is always the same number of buyers and sellers on each side of all actual trades, only the propensity or desire to buy or sell shifts with price over time. Maximum trading volume oscillates between either a price or a time, the market will continually hunt for each in turn.

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Last edited by ratfink; January 10th, 2014 at 06:21 AM. Reason: clarify my view
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In my extremely humble opinion, I think you nailed it. Thanks for sharing your idea.

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It's better if you think of it as "the most active price".

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josh View Post
It is not just you DT, but there is a straightforward way to reconcile this seeming paradox.

Agreeing on value must be true. After all, two parties are involved in the transaction and assuming neither is coerced, they each individually make the decision to transact.

But while they agree on value, as shown above, what they disagree on, assuming an outright speculation on both sides, is the future direction of the instrument.

One party happily buys at 500 (though he of course would be okay buying lower most likely), because he sees potential for appreciation. The counterparty happily sells at 500, having either realized a profit and seeing little potential for further appreciation, or selling short and seeing potential for downside.

So, value means the buyer and seller agree on a price, but chances are that they disagree on the prospects for the future.

This reasoning is no huge revelation, but it really is that simple.

I think @josh is spot on. I think it may be best to think of acceptance and rejection areas not in terms of what is happening now, but rather in relation to where perceived future direction is. So in the case of acceptance, both buyers and sellers agree that the current area offers value in terms of where they believe the market will move in the future.

Buyers and sellers disagree upon what direction price will move,....but they never the less agree that this area offers value in terms of their respective future directions (up or down).

Thanks @josh. ah ha moment for me

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>...Is it just me that thinks like this?<

I guess about half the population think this way... and the other half (or so) the other way.

I believe it simply depends on your perspective, and opposite views are to be expected. Your view could be seen as the 'half-empty glass', and the opposite view the 'half-full glass'.

Irrelevant to me, as buyers can buy, and sellers can sell to cover their positions, hence the opposite mentality to when they first sold/bought.

Areas of 'acceptance' and 'rejection' are just resting stages for smart folks/algos to accumulate or distribute holdings before moving on up/down. So just part of the overall game. Would not get hung up on price auction or similar theories written by academics who likely cannot trade well. They are discussing the basic mechanics of trading, not the art or science.

Richard
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