Auction Market Theory

Auction Market Theory provides information reliable enough that market decisions can be based on the Auction Market data.

In comparison to other trading disciplines, order flow trading does not contain that many trading strategies you can use. The reason why, is because there is no proper order book available which you can use to see when buy and sell orders are entering the market in real time. The strategies I’ve picked for this article aren’t full order flow trading systems, so you don’t have to worry about changing your current trading strategy in order to trade them, you can just use them as additional setups to watch out for when your trading the market.

Let’s move to defining core strategies.

When you have an idea what you want to use as core strategy, ask yourself:

·         What is the idea behind the strategy?

·         What are the strategy’s strengths and weaknesses?

·         What factors are giving my strategy an edge?

I’m using the stop hunt strategy myself, so I’ll answer the questions in the way I perceive it:

What is the idea behind the strategy?

Large traders cannot simply accumulate or distribute positions whenever they wish to do so, because they would suffer from slippage. Slippage can have a great impact on your P/L if you are one of the big players in the market.

What are the strategy’s strengths and weaknesses?

Strengths: Initiative of large traders behind it, clear sentiment gives us the support of other participants, clear profit target.

Weaknesses: Entry point can be somewhat hard to determine, another reason why we should focus on strong sentiment, so that we have the support of “the flow”.

What factors are giving my strategy an edge?

I only trade when sentiment is clear. I look for the market to trigger buy stops during positive sentiment and when sentiment is negative, I target sell stops. If sentiment is positive and price action starts to move accordingly, other participants will start to join the move.

There we have something we can already work with. As has been mentioned, the markets are all about greed of fear. Even professionals with a long and successful track record will sometimes find themselves in one of those states. It is not meant for us humans to be like robots, not even in trading. In combination with sentiment analysis, try to incorporate some psychology. Regarding those without a position yet, it is all about perception. Where will key demand and supply be located? And then are those with a position on, what’s their target? Do they have sentiment in their favor? Which side of the market is the weaker one? Where are the stops of the weaker side? Some questions you can ask yourself and note in your journal. While those questions are not easy to answer sometimes, it is about keeping it simple by observing and taking notes. Your subconscious mind is capable of amazing things and you have nothing to lose by trying it.

Your best bet is to focus on key supply/demand zones on higher time frames that will likely attract the flow necessary to ignite momentum.