How To Leverage the Auction Market Theory in Your Trading Strategy

June 1, 2024


Even the most experienced traders will face certain obstacles on occasion and need to change tack. At these moments, incorporating Auction Market Theory into your trading strategy could alleviate some of the uncertainty or even boost your portfolio’s performance. 

What is AMT, and how can it help you as a trader? The elegance of the answer may surprise you.

As one of the top Chicago prop trading firms, Black Eagle Financial Group provides the following guide on AMT and how it can impact your trading strategy. The team also offers tips that can help you navigate imbalanced markets wisely.

Use our insights below to improve your trades.

Understanding Auction Market Theory

When trading experts leverage AMT, their primary focus is on different market imbalances or gaps that influence people to either buy or sell a commodity. This theory purports that the financial markets will fluctuate with various market events. In turn, these fluctuations—savvy traders call them opportunities—create an imbalance between buyer and seller aggression, setting off the ‘auction’ mechanism as all players bid to find the perfect price.

Specialists cite the following components as central to AMT:

  • Fair value: In trading, this price level is where buyers and sellers agree to go through with the transaction. You often use the average point of control (POC) to determine what the “normal price” needs to be in a high-volume market. 
  • Balanced markets: In a balanced market, all trading activity stabilizes. Prices fall around the fair value price.
  • Imbalanced markets: When certain events trigger a change in stock or commodity values, either the buyers or the sellers will start to dominate the market. In that case, the instability or price fluctuations make trading more exciting (and risky) until things die down again.

So, where does Auction Market Theory fit into a fair value stock market trading strategy? With this theory as your foundation, you’ll be able to pinpoint fair value levels and make adjustments as market events put buyer and seller interactions out of whack.

This theory requires you to analyze the ongoing interactions between buyers and sellers, as well as monitor fair value ranges. When you have a full understanding of these concepts, you can use them in your decision-making and, hopefully, enjoy more trading successes. 

Applying Auction Market Theory in Reality

How do these concepts of balance and fair value apply to real-life trades? 

Let’s say you’re looking at buying a new car. The model you’re considering carries an average value of around $25,000. This is the vehicle’s fair value the majority of the time, though some buyers may get it for just slightly above or below that price.

Now, before you commit to the vehicle purchase, the car’s maker announces production problems, which they expect will limit the number of cars available. This market event creates an unexpected imbalance between car buyers and dealerships or sellers. The lower availability (reduced supply) of cars causes a frenzy as buyers scramble for a vehicle and are willing to pay a little more for it to secure the deal. 

That shift in the market could mean selling at $30,000 or even higher, which is well outside the car’s fair value range. Following Auction Market Theory, you would notice the shift from fair value and be able to adjust your trading strategy to incorporate the difference to, let’s say, an auto manufacturer’s share price until the markets settle into a new groove.

How Market Profile Facilitates Traders Using the Auction Market Theory

Of course, it’s a whole other ball game to predict certain market events. A helpful charting tool is Market Profile, which can take some of the guesswork out of AMT. 

Market Profile provides insights into the following components:

  • Price
  • Volume
  • Time

Using this tool, you could evaluate changes in a stock’s price or its buying or selling volume over a certain period. Once you understand the overall market’s trends, you can then use this data to determine the fair value range of the stock or product. From there, the “herd behavior” of other buyers and sellers could guide what you do next.

The Benefits of Using AMT in Your Trading Activity

Why incorporate Auction Market Theory into your trading habits? Financial experts agree that this philosophy helps traders react to market imbalances in meaningful ways. It’s about price discovery.

The top advantages AMT can bring to your trading game include the following:

You’ll Have a Better Understanding of Fair Value

Are you buying stocks at a fair price or at a time when buyer aggression is so high you’re paying more per share? Applying AMT to your trading allows you to fully analyze subtle fluctuations in the fair value range so that you can make better decisions. 

Proprietary trading firms like Black Eagle Financial Group support this approach with custom reporting, giving valuable insights into different market metrics. For instance, you can look at the order flow and volume of certain products to see if buys or sells would benefit your portfolio. 

You’ll Focus Less on Predicting Market Events 

Every experienced trader knows that market volatility is unpredictable. While it’s smart to watch for events and act quickly, Auction Market Theory helps you take some of the focus off of the more stressful prediction side of things.

Instead, you can spend more energy riding out the discovery phase during either a buy or sell imbalance. Just evaluate the interactions between buyers and sellers and act accordingly. 

You’ll Take Advantage of Trend Trading

If prices are still in limbo, you can make trades that support the direction of imbalance. 

AMT allows you to simply capitalize on the momentum that a market event brings where other buyers or sellers are still speculating on what’s coming.

How the Auction Market Theory Impacts Global Markets

Using AMT as a professional trader allows you to focus on issues that throw off the market’s balanced state. That certainly helps you make better decisions when trading a stock market, but savvy sellers and consumers also apply AMT to:

  • Real Estate
  • E-commerce
  • Retail
  • Agriculture
  • Art or collectibles

Whether you’re dealing with homes or prized collectibles, Auction Market Theory sets the tone for how sellers price certain commodities and whether they’re nailing it. The thinking goes well beyond supply and demand to understand the actual interactions between buyers and sellers. If you’re an AMT-minded trader or consumer, neither the niche nor the level of market diversity matters.

Contact Black Eagle Financial Group for Professional Trading Solutions

Can you conquer all types of trading markets with Auction Market Theory? Absolutely.Are you ready to improve your trading activity with access to secure capital? Give Black Eagle Financial Group’s proprietary trading firm a call today at (833) 253-2453. The team also provides a helpful mentorship program so that you can hone your skills.

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