When trading within the parameters of Auction Market theory there are a set of laws that one must abide by in order to properly identify trading opportunity zones, once these laws are understood and applied the only remaining factor is analyzing price action using the Depth of Market to find the exact zone of interest to enter the trade, from there is is a matter of how we manage the trade within its distribution of price. You can learn more about the Depth of Market (DOM) here.
Before we dive into the intricacies of these laws we must first understand the terminology that will be used to explain the areas of interest within price's normal bell curve distribution, these terms are extensively covered here.
The laws are meant to encompass price behaviors and their tendencies within the price bell cure distribution. As price is "Balanced" where buyers and sellers agree on price then the market will chop around until there is an excess of "supply" or "demand" through aggressive market participants entering the market or lack there of in which market then becomes "imbalanced" and price finds a pervious new balanced area where buyers and sellers are once again in "balance." The illustration below highlights the markets rotations and how value is found within the markets cycles.
8 Laws of Price Distribution:
1. If price is int balance / value area / POC, it is likely at some point price will test either end of the value areas high or low.
2. As long as we remain in balance we will at some point test the edges of value High or Low - This is where opportunity lies and where we as traders want to initiate trades ack into balance, if you are a bull or bear in the ranges current distribution.
3. Price will always be choppy inside the balance zone of price and balance will be within 1 distribution of the current POC. This area is NEVER where you want to initiate a trade but where we should reduce exposure after entering a trade at the Value area LOW or Value are HIGH.
4. If price leaves the balance / Value Area then we are imbalanced and price will form a new balance zone equal to the previous balance zone.
5. If we create value above the previous balance it is likely we will gravitate to the previous POC of the prior balance up or down. Learn to identify these POC value areas covered in my volume profile blog post.
6. If price has aggressive reaction off POC then Law #1 is invalidated - This can happen when we come out a value / balance area and move into a previous balance area from a prior range above or below .
7. The edges of Value Area High / Value Area Low are - "Resistance" / "Support" zones.
8. If Market Profile (TPO) & Volume Profile forms balance at a VAL / VAH it is likely we will break out / down of those areas. For example if we're trading at a value area low for a prolong period of time and we do not come back into the balance / value area then it is likely we are going to break down and create an imbalanced move down into a previous value area.
The illustration below cover the laws in its physical entirety and how price's behavior around balance and value areas is subject to move around its bell curve distribution during the markets on going auction.
In the video below this is covered in video format , I also use this very analysis in my day to day intra day trading session live.
Conclusion :
The fundamental laws of distribution of price can provide you with probabilities of the markets rotations using the principles of Auction Market Theory in order to give us traders the possibility of where we can find opportunity as price "churns" in a range or into new ranges and where we can anticipate areas to open a trade and close as price trades form balanced to imbalanced areas. Using these laws can give us a more structured view without having to guess where price can go in our favor. It helps eliminate the ability to close a trade to early and provide guidance as to what is ultimately possible along side giving opportune low risk areas to enter a trade and when not to initiate a trade idea, removing bias and in turn reducing our losses and times we enter in and out of the market.