Auction and liquidity theory
Lesson 18 of 39 in the course “Crypto”. Free, with animations and a quiz.
The market is an auction. It looks for a price buyers and sellers agree on. While it trades in a box, that is balance (fair value).
Imbalance: buyers will pay more. Price runs to find a new fair price (price discovery).
New balance higher up. At the top aggressive sellers find it expensive, at the bottom aggressive buyers find it cheap.
Failed auction: price shot past the edge but nobody accepted it, and it snapped back into the box. A strong mean-reversion signal.
Volume profile on the right: two humps = two balance zones. A hump is a price the market sees as fair. The gap between is thin: price whips through it.
Check yourself
- What is balance in auction theory?
Correct answer: A range where the market agrees on price. Balance: price moves inside a box, and buyers and sellers both see it as fair. A sharp move to a new price is imbalance. - A failed auction means...
Correct answer: Nobody accepted the price past the edge, so it came back. Price jumped past the edge of the box, found no trading there and went back inside. It is a false move out, not the start of a new trend. - A volume profile shows how much traded at each price. What does a hump on it mean?
Correct answer: The price with the most volume (fair value). A hump is where most trading happened: the market “agreed” on that price. Price usually moves quickly through the thin gaps between humps.