Of Failed auctions and revisits

In Market profile we see the movement of price as an auction between buyers and sellers negotiating value during the day across time frames.

If prices move higher then we say that buyers are in control and if they go down then sellers appear to be controlling.

Most of the times, the first 60 minutes appear to be the time when the market is establishing value for the day and is referred to as the Initial Balance. This is especially the case in markets like ours which do not confirm to 24 hour futures trading and hence knowing the first 60 minutes of activity becomes very important for a trader in the day time frame.This can also be seen as Opening Range by traditional Chartists though we like to be rigid about maintaining it at 60 minutes.

As markets do not always stay within the first 60 minutes of activity the whole day, the movements outside the initial balance often produce some amazing trading opportunities for all traders.

One such trading opportunity is what we called the Failed Auction.

This particular variant of the failed Auction was popularized by a Market Profiler named Ray Barros and brought to our attention by Vandana from http://mercurycapital.blogspot.com/

Failed Auction Theory : A failure to stay outside the initial balance for more than 30 minutes (on one side), followed by a revisit inside the initial balance and an opposite move on the other side of the Initial balance.

After a failed auction, the initial move is in the direction opposite to the one that failed, but the beauty of the theory as pointed by Ray Barros is that the market will revisit the failed auction zone in about 5-6 days in over 75 % of the cases.If it does not visit back in 5-6 days then the movement after the failed auction will continue for several weeks.

Let's look at a chart to understand this :

In the chart above

a) the letters 'd' to 'q' represent 30 minutes of market activity each with d being from 9.15 to 9.45, e from 9.45 to 10.15 and so on.

b) The Initial balance is the Orange vertical line or the dotted orange lines.

c) On the 6th of may, we had a failed auction when the market moved lower in the 'k' period but reversed immediately back into the Initial balance.

d) The market continues with the momentum of the failed auction higher in next 1-3 sessions

e) The failed auction of 6/5 was revisited today 13/ 05 which was the 5th day.

Here is another example from a chart of 31/ 3

31/3 was the failed auction and a week later we were back at the same level again.

Happy hunting.