Auction market theory says a market is a two sided auction that moves in search of a price where business gets done. Price rises to find sellers and falls to find buyers. When both sides agree on value, trade balances and price rotates. When they disagree, the auction moves until it finds agreement again.
That is the whole idea. Everything else in this article is detail hung off it.
It matters because it is the only framework I know that answers the question underneath every setup you will ever take: not what is price doing, but why. Indicators describe. Patterns describe. The auction explains. Once you have the explanation, the tools stop being signals you obey and start being instruments you read.
What the theory actually claims
A market exists to facilitate trade. That sounds obvious, but it has a consequence most traders never follow through on: price is not the goal of a market. Price is the mechanism a market uses to find the level where the most business can be done.
If price is too high, buyers stop showing up. Volume dries out. The auction has to come down to find them. If price is too low, sellers withdraw for the same reason, and the auction has to go back up. Either way, price is advertising. It moves to attract the other side.
So when you see a sharp move away from a level, the theory does not read it as strength or weakness in the way a momentum trader would. It reads it as a market that failed to do business there and is now searching somewhere else.
The practical version of this: a market spends most of its time doing business, and only a little of its time travelling between the places where it does business. Recognising which of those two things is happening right now is most of the job.
Where the framework came from
This is not a social media invention. It came out of the pit.
J. Peter Steidlmayer was a trader at the Chicago Board of Trade. He joined the exchange in 1963 and served on its board of directors from 1981 to 1983. During that period he pushed through two things that changed how traders could see the market.
The first was Market Profile, introduced publicly through the CBOT in 1985. It organised the day by price and time, showing how long the market spent at each level rather than just where it opened and closed. The characteristic bell shape that emerged was the visual proof that markets distribute around a fair price.
The second is the one almost nobody mentions, and it matters more for how we trade today. Steidlmayer also drove the creation of the Liquidity Data Bank, an exchange dataset that broke volume down by price level. That is the direct ancestor of the volume profile sitting on your chart right now.
Worth sitting with, because it corrects a common misunderstanding. Volume profile is not a modern competitor that replaced Steidlmayer's old time-based method. Both came out of the same body of work, at the same exchange, from the same person. If you want the full comparison, I wrote it up in Market Profile vs Volume Profile.
The three states of the auction
Every market, on every timeframe, is doing one of three things. Learning to name which one, quickly and without arguing with yourself, is the skill.
Balance
Buyers and sellers broadly agree. Trade concentrates in a range and price rotates inside it, testing the edges and coming back. On a profile this builds the fat, symmetrical bell shape.
Balance is not boring. It is the market working normally, and it is where most of the session lives. In balance you fade the extremes and treat the middle as a magnet.
Imbalance
One side takes control. Price leaves the area and travels, because the other side has stepped back and there is nothing to stop it. The profile stretches thin and tall instead of fat and round.
In imbalance, everything you learned about fading the edges will hurt you. This is the state where traders who only know how to sell highs get taken apart, because the high keeps moving.
Transition
The handover between the two. Balance breaking into a trend, or a trend running out of participation and settling into a new range.
Transition is where the money is and where the damage is, for the same reason: you are acting before the state is confirmed. Get it right and you are positioned before the move. Get it wrong and you are fading a trend that has not started yet, or chasing a breakout that was never one.
Two ES session profiles side by side: a balanced day showing the fat symmetrical bell, next to a trend day showing the thin elongated profile. Same instrument, same scale, so the shape difference is obvious.
I go through how to call these live, including the tells that show up before the state changes, in Balance vs Imbalance: reading the state of the market.
Value, and what the value area really is
Value is where the market did its business. Not where it touched, not where it wicked, but where it actually spent size and time.
Three references come out of that:
- Point of control (POC). The single price with the most volume traded. The market's own answer to "what is this thing worth right now".
- Value area. The band holding roughly 70 percent of the session's volume, centred on the POC.
- Value area high and low (VAH and VAL). The edges of that band. Price above VAH is expensive by the session's own standard. Below VAL it is cheap.
The 70 percent is a convention, not a law. It approximates one standard deviation around the mean of a normal distribution, and Steidlmayer used it as a workable way to draw a line around "most of the business". Some platforms and traders use 68 percent. The difference will not decide your trade.
What decides your trade is what price does when it reaches those edges, which is a question the profile cannot answer on its own. That is the handoff into order flow, and it is the single most important junction in everything I teach.
A single ES RTH session volume profile with POC, VAH and VAL clearly labelled, and price shown rotating between the value area edges. Ideally a day where price tested VAH, failed, and rotated back to POC.
Initiative and responsive activity
This is the piece that separates people who have read about auction theory from people who use it.
When a buyer lifts the offer above value, they are not buying because it is cheap. They are buying despite it being expensive, which means they have a reason that has nothing to do with the current price. That is initiative activity. Someone wants in badly enough to pay up.
When a buyer steps in below value, they are doing the ordinary thing: buying something that got cheap. That is responsive activity.
The distinction matters because the same action means opposite things depending on where it happens. Aggressive buying at the low of a balanced range is responsive and usually mean-reverting. The identical aggressive buying above the value area high is initiative and often the start of a move. If you are not tracking where the activity sits relative to value, you cannot tell those two apart, and you will keep taking one for the other.
How I actually use this on ES
Before the open, I am not looking for a trade. I am answering three questions.
- Where was value yesterday, and is price inside it or outside it now? Inside means the market still agrees with yesterday's read and I expect rotation. Outside means something changed overnight and I want to know what.
- Is the overnight session balanced or one directional? A quiet, balanced overnight into a US open behaves nothing like an overnight that trended for six hours.
- Where are the areas price moved through quickly last session? Those thin spots tend to get revisited fast, because no real business was done there. More on that in high volume and low volume nodes.
That is the whole pre-market read. It takes about ten minutes and it decides which kind of day I am willing to trade. The entries come later, and they come from order flow, not from the profile.
What auction market theory will not do for you
I would rather say this plainly than have you find out with money on.
The theory tells you the state and the context. It does not tell you when to click. A value area low is not a buy signal. Plenty of markets go straight through the value area low and never look back, and the profile gave you no warning, because a profile is a record of what already happened.
It is also slow to update. By the time a profile shape confirms a trend day, a good part of the trend has happened. The confirmation you actually trade on has to come from something faster, which in practice means watching the executed orders through a footprint chart and tracking aggression with cumulative delta.
And it will not save you from bad risk management. The auction framework has nothing to say about position size. Traders lose accounts holding correct reads.
Where this sits next to what you already know
If you came from indicators, auction market theory replaces the question they were answering. RSI tries to tell you when something is stretched. The auction tells you what stretched means here, today, relative to where business is being done.
If you came from smart money concepts, you will recognise a lot of this. Ideas about liquidity, about price returning to areas it moved through too quickly, about institutional participation, all have direct equivalents in the auction framework and in the volume data that measures it. Those overlaps are worth examining honestly rather than treating as rivalry, which is what I do in ICT concepts and auction market theory.
Either way, the sequence I would recommend is the same. Learn the auction first, because it is the reasoning. Then learn volume profile, because it measures the auction. Then learn order flow, because it shows you the auction happening in real time. Skipping to the last one is why so many traders own an expensive platform and still cannot explain why they took the trade.
Frequently asked questions
What is auction market theory in simple terms?
It is the idea that a market behaves like an auction. Price moves up to find sellers and down to find buyers. When buyers and sellers roughly agree on price, trade concentrates and the market balances. When they disagree, price leaves that area and searches for a level where business can be done again.
Who created auction market theory?
The framework grew out of work by J. Peter Steidlmayer, a trader at the Chicago Board of Trade. He joined the CBOT in 1963 and served on its board from 1981 to 1983. Market Profile, the charting method built on these ideas, was introduced publicly through the exchange in 1985.
Is auction market theory the same as volume profile?
No. Auction market theory is the reasoning about why price moves. Volume profile is one tool for measuring it, by showing how much volume traded at each price. You can use volume profile without understanding the theory, but the levels will not mean much to you.
Does auction market theory work in forex?
The reasoning applies to any two-sided market. The measurement does not translate cleanly, because spot forex has no central exchange reporting total volume. Your broker only shows its own flow. Traders who want the theory and the data together generally use futures, where the exchange records every transaction.
Why is the value area 70 percent of volume?
It is a convention borrowed from statistics, roughly one standard deviation around the mean of a normal distribution. Steidlmayer used it as a practical way to mark where most of the session's business happened. There is nothing magic about the exact number, and some traders use 68 percent instead.
How long does it take to learn to read the auction?
Understanding balance and imbalance takes an afternoon. Recognising them live, in a market that is still forming, takes months of screen time. Most traders can describe the three states long before they can act on them, and that gap is where a mentor shortens the process.