The auction and how price forms

A two-way auction

In an ordinary auction the price only goes up. A market goes both ways, and it is worth stating the two halves plainly because they are symmetrical:

• Price moves up to find sellers.
• Price moves down to find buyers.

That constant advertising of prices to see who responds is price discovery. The market is not announcing a valuation. It is asking a question, repeatedly, and the answers are trades.

Balance and imbalance

Two states, and the whole of this stage is about telling them apart in real time.

Balance

Both sides are content to trade around a price. A lot of volume changes hands in a narrow range, and the chart looks sideways. The market has found where the business is.

Imbalance

One side becomes more aggressive than the other can absorb. Price travels — not because anybody decided it should, but because it has to keep going until it finds enough of the other side to stop it.

The corollary that surprises people

If movement happens because the other side ran out, then a fast move is not a crowded event. It is the opposite.

Fast means few. Prices that fly past are prices where almost nobody was willing to trade.

This inverts the instinct that a big candle means a lot of conviction. Sometimes it does — that was the whole point of the very first article of stage 4, where the same candle came from a thick book and an empty one. Reading the difference is the entire purpose of the instruments in the rest of this stage.

And it explains why the same amount of aggression produces a small move at midday and a large one at four in the morning, which is the article on sessions arriving with a mechanism attached.

«Fair value» without the moralising

The area where a lot of volume changes hands often gets called fair value, and the phrase invites a wrong idea — that the market has decided something is objectively worth that.

It has not. It means only this: at those prices, the most business got done. Most people who wanted to trade could trade there. That is a description of activity, not a judgement of value, and it is useful precisely because it is so modest.

Which gives the sentence the rest of this path keeps returning to, now with a reason behind it: price tends to return to where the business was, and it tends to travel quickly through where there was none. The instrument that measures that properly is the whole of the next stage.

Four words, defined once

Those four are the grammar of this stage. Every instrument that follows — the tape, the footprint, delta, absorption — is a different way of measuring the same two states, and the last article of the stage puts a formal name on the whole framework.