How to Read the Market Auction in Real-time

Last updated on February 27th, 2020

I want to give you an analogy to how some people might approach the market because it will probably be better to get this point across. So I’ll use the analogy of hiking.

Compass and trekking map. Color image

Let’s say you’re going to hike across open terrain leading into a wooded area and then up a reasonably sized hill. Now there are two approaches to this exercise. The first is that you just show up and attempt to use your astute sense of direction, innate ability to read the varying terrain and seemingly supernatural weather predicting capabilities. The second is that you appropriately prepare for a number of factors that could have a defining impact on your success or failure.

Now if you have years of hiking experience under your belt, you might stand a fighting chance of getting where you’re going without too much trouble. But even so, if you’re in an unfamiliar climate and terrain, no matter how skilled you are it will not be easy for you. Understanding the weather conditions/patterns of the area, what the route is like, if there are particularly hazardous features to contend with and simply the direction you need to take are all going to help make your journey that little bit easier.

A skilled hiker will consider their expedition before they set out and not try to figure everything out as they go.

 

Figuring out the context before the session begins

Understanding how the market is moving as the auction unfolds is going to be similar – it’s easier to figure out what the market is doing and therefore what it might do next, if you’ve already assessed the lie of the land. For this reason, I’ve recently adjusted the EU Traderoom session to begin earlier so that we can run through what might lie ahead before trading commences. In the example video at the end of this post, I run through the context for the FTSE that we talked about before the session started and the subsequent trade we took.

There are several important factors to weigh up in assessing the market terrain and current state. Market state can be assessed to a reasonable extent by simply creating boundaries where the action is either moving directionally and possibly exploring new territory or retesting nearby levels again and again – by doing this it’s also easy to generate some important auction technical reference price levels.

It’s also important to figure out what the market is trying to do and therefore whether the current activity is likely to continue or not. In the case of the FTSE, it was trying to go higher but was clearly not able to do so with the same ease that it did in the highlighted imbalanced phase to the far left of the chart. This might suggest that the market is becoming top-heavy and a break back lower could precipitate a decent amount of selling.

The final part of a simple assessment of context is to look at how the market is moving relative to past and anticipated key economic events/data releases. It could be tightly balanced in the build up to the BoE report for example. But it could also be moving directionally in anticipation of an upcoming data release being particularly strong or weak.

 

Market tells

Once you’ve have at least some sort of idea of what the market is doing then you are far better placed to read the market auction in real-time as the action unfolds. There are all kinds of behaviors and price action that can indicate something about what the market is doing, but in order to draw meaning from them it’s crucial to understand a key principle.

This is that although interesting behavior can appear absolutely anywhere, the most important tells tend to be in or close to areas of contextual significance. So understanding where these areas are on your chart before you start to trade for the day means all you have to do is monitor how the market reacts to them.

Of course, because the auction is an ever-unfolding story, what happens at the following point of interest is going to be critical to how the market subsequently acts – e.g. just because there’s an important area level that initially sees the market bounce, if it can’t show subsequent strength then there’s a distinct possibility it will break through on any retest. But one way or another, the information presented by the activity can be useful to a trader.

 

Pinpoint the best opportunities

So what does all of this have to do with your trading strategy? Whatever the day trading strategy you choose, if you’ve prepared and you know how to read the market auction in real-time, you’re going to stand a much greater chance of understanding where favorable movement is likely to occur.

Pinpointing where and when the market is going to present you with the highest probability trades available to your particular method and avoiding those that are more risky, can be the difference between being able to trade professionally for a living and never making the turn.

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