Original subtitles

So before we dive into the technical

aspect of the volume profile, we're going

to first look at some theory. Because a

lot of new traders, a lot of retail

traders fail to put any importance on

learning why the market moves the way it

does when it's such an important piece of

the puzzle if you want to take a

professional approach to the markets. So

we're going to discuss what's called

auction market theory. Now, auction market

theory forms the basis of what the volume

profile represents. And it's also the

basis of how any market moves, whether

that's a local farmer's market, the stock

market, the currency market, any sort of

market can be explained using auction

market theory. So by the end of this

lesson, you will understand how all

markets operate as continuous auctions.

Get used to that word auction. You will

learn the concepts of balance, which is

fair value, and imbalance, which is price

discovery. And you'll see how buyers and

sellers interact to move price. And by

understanding auction market theory,

you'll be able to better recognize the

patterns of price behavior in auctions,

which therefore will help benefit your

trading as we move into using the volume

profile. So all markets, again, whether

that's stocks, forex, futures, even your

local farmer's market, all operate like an

auction. In an auction, buyers are always

seeking to pay the lowest price possible

relative to fair value. Why is that? Why

is that? Because they're trying to get

something at a discount. They're trying to

purchase products at a fair discount, and

they don't want to overpay for whatever it

is they're trying to purchase. In the same

way, sellers are always trying to sell at

the highest price possible in order to

make as much profit as possible. Sellers

don't want to sell something at a discount

because they're going to lose money. So

sellers in general are trying to sell at

the highest price point that they can

without scaring away the buyers. So price

will move up until buyers refuse to pay

any more, or price will move down until

sellers won't accept any less. So the

market's primary job is to facilitate this

trade between both buyers and sellers by

finding a price point or a price range

that both sides can accept as what we call

fair value. So any price you see is simply

an advertisement to attract opposite side

traders. So if prices are low, for

example, that's to attract new buyers.

Buyers will come in and buy up those low

prices until price moves back to an area

of fair value or more. And in the same

way, high prices will attract sellers

because then sellers can get in and sell

their product at a premium until price

moves back down closer to fair value. And

this auction is a continuous process. And

every tick that you see, every tick that

the market moves is part of a negotiation

between both buyers and sellers. And what

we're doing when we're analyzing volume

for using the volume profile, for example,

is analyzing the participation in the

auction at each price, seeing how many

buyers and sellers are engaging at certain

price points, and then making deductions

from that information in order to make

good trading decisions. So if we look at

the stock market here, look at some

candles as a simple diagram here on the

right. This will help you to understand

the two states that the market is in. The

market can always be in either one of

these two states. So we either have a

balanced market, which is what we call

fair value. And in a balanced market, the

market has found a specific price range

that both sides can agree upon. And in

these balanced markets, you'll find price

will rotate up and down inside of a range.

Some traders call this consolidation, a

channel, whatever you call it. This is

simply a state of fair value, a state of

balance. And in these balanced market

conditions, trades are often slow and

choppy because both buyers and sellers are

transacting heavily in here, causing the

slower, thicker price movement. And this

is what we call equilibrium. So we can see

on the right hand side here, this is what

your typical balanced market will look

like. Now, if the markets aren't in a

balanced state, then they're in an

imbalanced state. And that's what we call

a price discovery mode. So when the market

is in price discovery, what it's doing is

moving away from previous fair value in

order to find a new level of fair value.

Now, again, the reason that price does

this could be from outside factors such as

news, economic data, or simply because one

side of the market is less willing to

engage, causing the market to enter an

imbalanced state. So if, for example, on

the right here, if we can see that there

are more buyers than sellers within this

fair value range, sellers suddenly decide

they don't want to sell in this range

anymore, then buyers will take control,

moving price to the upside until price

finds a new area of fair value. And when

price is in this imbalanced state, price

will often travel quickly, often breaking

prior highs and lows as one side of the

market takes clear control. So at any

point in the day, the market alternates

between balance, which is where the market

is building value, or imbalance, which is

where the market is finding new value.

Now, your typical trend day will happen

when the market is moving in one direction

to establish a new fair value area,

wherever that may be. Then when the

markets are in a range day, this is what

happens when the markets are in balance,

and we are in an area of fair value. So

price is constantly probing both sides,

testing higher to find more buyers, and

testing lower to find more sellers. And

here on the right here, you can see a

random example. This is the S&P 500

futures. You can see throughout the

trading day from 9.30 a.m., which is the

New York Open, through to 4 p.m., which is

the close, the market went through

multiple different states. This is a one

-minute chart. You can see the market went

through states of balance, where it moved

back and forth, and you can see that

participation was high across these

levels. The market's moving here between

balance. Okay, a test lower, finds a

little bit more balance, comes back to the

area of fair value. Tests higher, finds no

more buyers. Buyers are no longer willing

to engage at these highs, so sellers take

control, shifting away until new fair

value is found lower and lower in price.

You can see these little pockets of value

and balance occurring across the market as

we move down. So don't worry if this seems

a little bit confusing right now. We will

go into more what this means in practical

application and how to use this to make

trading decisions, but I just want you to

understand this auction process and

understand what it looks like in the

markets. So why is this important? Well,

understanding this auction process helps

you to read market behavior in real time,

and when you can anticipate when the

market is likely to A, stay in balance, or

B, move to imbalance, then you'll

understand, okay, if the markets are in a

balanced state, a good approach will be to

look to fade the extremes, or if the

markets are in a trending or a breakout

type state, an imbalance seeking new

value, then you're best looking for

breakout or trending strategies versus

playing a range. And the volume profile,

the main tool we use with this trading

approach, is a technical visualization of

this auction process. So key takeaways for

this lesson are, number one, the markets

are not random. It doesn't move totally

randomly. What it is, it's a structured

auction between buyers and sellers, where

price is moving to find agreement

alternating between both balanced states

and imbalanced states until fair value is

found. And this auction never ends. It's a

continuous auction where the market is

seeking fair value. And recognizing these

different auction phases will help you to

trade in alignment with market conditions,

and having this understanding of the

auction process will help you to

understand why the markets move the way

they do. So that's a brief overview of

auction market theory. It's all you need

to understand on a surface level. Make

sure this lesson really sinks in, and make

sure you understand those two states of

the market, balance and imbalance, and why

these states occur. So go ahead and

complete this lesson now, and we can move

on to the more technical aspects of the

volume profile and see how we apply this

theory to the markets in action. you have

to go to the next episode of the place.

aging standard annotation, at the end