who gets the "painting").
So, there are few guys at the top of the swing point who are probably
ready to fight for the prize, but they don't get the opportunity. In this case, the auction has
failed because it doesn't have one winner.
The failed auction is an imperfection. The market will eventually sort it out and give those guys
standing at the top of the swing point a chance to fight and see how far the price can go until
there is only one "winner." In other words – the failed auction is an imperfection that the
market will sooner or later sort out. Failed auctions work like a magnet. If the price comes
near such an auction, then it is most likely to test it and create new high/low to take care of
the imperfection.
Here is an example of a failed auction:
We can use knowledge of failed and successful auctions to our advantage!
In the picture below I marked several failed auctions. Notice how the price reacts to them and
how it shoots past those failed auctions. Price shooting through failed auctions solves the
market imperfection. A price shooting past a failed auctions changes it into a successful
auction.
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The arrows show where the price went through the failed auctions to change them into
successful auctions.
Another picture is an example of a trade I took yesterday:
I was in a long position, and my Profit Target would normally be 10 pips (that’s the usual PT
for my intraday trades). However, there was a significantly failed auction close to my Profit
Target. I knew that the price is likely to test above the failed auction to get rid of this
imperfection and to test if more buyers are willing to buy above this failed auction level. With
this knowledge, I moved my Profit Target one pip above the failed auction, and instead of +10
pip profit, I took +13 pip profit. Here is the trade:
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If you are a swing trader, then few pips may not look so significant for you. Still, you can use
the failed auction theory also for swing trading and gain much more than +3 extra pips. It could
be for example +30 pips in swing trading. A nice thing about all the things I show you is that
they can be applied to all timeframes and all sorts of trades.
There is one more way to use the failed auction to your advantage. As I said – the failed auction
is a market imperfection. For this reason, when the price comes near it, the failed auction
starts to work like a magnet. The price is driven to it and through it to “test“ above/below the
failed auction to remove the imperfection. So, whenever I consider taking a trade, I always
watch if there is a failed auction nearby.
If I want to go long, then I don’t want to see a failed auction below my long level because
the market would push the price towards the failed auction – to test below it. This would
result in a losing trade.
If I want to go short, then I don’t want to see a failed auction above my short level because
the market would push the price towards the failed auction – to test above it. This would result
in a losing trade.
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