Is auction market theory required to get a profitable trade?

<p id="isPasted">Auction Market Theory is a philosophy that financial markets move higher and lower due to imbalances between buyer and seller aggression (caused by market events) until price discovers a level where aggression is balanced and the most trade can be facilitated (Fair Value).</p><p><br></p><p id="isPasted">There’s no agreed upon definition of AMT, but this is my definition and I think it’s pretty logical.</p><p>To dive a little deeper into AMT let’s take a look at fair value and imbalances.</p><p class="forexqa-img-container"><img src="https://prod-forexqna.s3.amazonaws.com/uploads/froala_editor/images/1740980583304.png" style="width: 730px;" class="fr-fic fr-dib fr-draggable forexqa-img"></p><p><br></p><p>Graph Showing Normal Distribution and Fair Value of 1 Deviation</p><p>Fair Value is the price area that facilitates the most trade between market participants. Buyer and seller aggression are closely balanced resulting in price trading in a tight range on higher volume. When a security is trading at fair value it’s in a state of balance.</p><p>Market Profile Traditionalist use 70% of session volume (instead of 68.2%) to determine Fair Value where the point of control is used as the mean. The point of control is simply where the most transactions took place represented by the most volume.</p><p>Thus, prices above or below the high-volume fair value price are considered “unfair” prices (i.e., not accurate reflections of the traded security’s true intrinsic value).</p><p>Imbalances occur in the market as a result of market events that that cause either buyers or sellers to become the aggressor.</p><p>We can determine buyer and seller aggression by analyzing speed of tape, volume, delta, and bid versus offer liquidity.</p><p>The goal of AMT traders is to determine if the market is balanced or imbalanced and then apply the appropriate trading strategy based on that analysis.</p><p>In balanced markets, AMT traders will look to fade moves away from Fair Value (Mean Reversion). Conversely, when markets are imbalanced, AMT traders will look to trade in the direction of the imbalance as the market goes into discovery.</p><p>When the market is in the discovery phase during a buy imbalance, buyers will drive prices higher in search of new sellers. In the same manner, when a sell imbalance occurs sellers will drive price lowers in search of new buyers.</p><p class="forexqa-img-container"><img src="https://prod-forexqna.s3.amazonaws.com/uploads/froala_editor/images/1740980789516.png" style="width: 730px;" class="fr-fic fr-dib fr-draggable forexqa-img"></p><p>The flow chart above represents the constant rotation the financial markets go through, from balanced to imbalanced and back to balanced through discovery.</p><p>To help drive the concept of auction market theory home, let’s take a look at another market that you’re probably much more familiar with, the new car market.</p>