# Basics of auction theory in cryptocurrency markets

Very comfortable for the trader are technical indicators such as: moving averages or RSI. They look great on the charts, which makes the trader feel illusory security. The problem is exacerbated when a similar tool contributes to success, because reality shows that the vast majority of market participants have no idea about its mechanics and the order flow behind it. In the article we will put emphasis on the theory of auction, which we can learn from classic books about trading. As an example, we will take a cryptocurrency exchange on which concepts such as liquidity are particularly important.

## Impact on the price of Fair Value cryptocurrencies and the auction process

According to auction theory, cryptocurrency markets and the like, i.e. currency pairs, shares of listed companies, do not differ significantly from other markets, e.g. from the market of food products. This is attracted by the fact that the price is nothing different from the mechanism "advertising" a given instrument to market participants at different levels.

If interest in a given level increases, the higher the turnover on it and the higher the probability of finding interest at the same level in the future.

In the other direction, it is similar – if interest in a given price decreases, the more the chance of rejecting it by the market mechanism and returning to the most willingly chosen areas, called in the theory of auction Fair Value,and thus adequate value, increases.

## Investing in cryptocurrencies with the help of the Gaussian curve

Volume accumulations representing the price are called balances and in auction theory we analyze them using the basis for determining the statistical probability thanks to the so-called Gaussian curves. The assumption, which is part of the foundation of the theory, is that the market is in one of two states – a sideways trend or a directional impulse/trend. Balances are side trends representing the balance between the demand and supply of a given area.

With the help of impulses, the market "jumps" between value levels, which sometimes builds completely new, previously un explored areas. That is, the price "travels" between areas, testing them and settling on those on which they will be accepted.

All this may seem quite complicated at first, but reality shows that auction theory can simplify the understanding of the market as much as possible. In this case, the probability analysis is quite conventional (which is partly the result of imperfections in the profiles recorded by the market) and instead of giving us ready-made answers, it helps to find a foothold in the process of determining the profitability of the selected investment in cryptocurrencies.

Auction theory is characterized primarily by universality and the fact that it can be supplemented by other analytical methods, such as Wyckoff'sextremely friendly methodology. Instead of two states, it proposes several, but the correct recognition of one of them increases the probability of success of the transaction, the more so because usually proposing a very favorable profit/loss ratio, it can significantly exceed the values of 1: 3 or 1: 6.

## Market liquidity

On the stock exchange you can meet with two types of orders – market and pending. The latter are often referred to as the main strength of the market, as they are associated with financial institutions that have such large resources that they cannot put them into circulation by means of market orders. Limit orders, i.e. pending orders, act as a wall of cash inthe market, which prevent the price from further rising or falling, taking place during the so-called absorptionprocess, in which aggressive market orders are absorbed by pending orders of higher value.

When you place a pending order, or limit order,you contribute to the creation of liquidity in the market. In addition, even if your positions are opened with aggressive orders, you place limit orders using stop loss or take profit levels. The cryptocurrency exchange is characterized by low liquidity due to the lack of an adequate number of pending orders.

If we are dealing with a large number of pending orders on the market, by a small number of traders executing them, then we are dealing with a phenomenon of high liquidity, although low volatility (called high liquidity – low volatility). These circumstances create conditions that are not friendly to short-term investors using scalping techniques.

An example from the opposite pole are markets with high volume – executed orders and low liquidity. Cryptocurrency exchangesbelong to this. Due to the high volatility of prices, they have become a natural environment for scalpers and people looking for opportunitiesto make a quick profit despite taking very high risks.

## Author

• Trainer in the field of finance, as well as a manager and speaker. She enjoys the development and success of her colleagues. He describes himself as an active, dynamic and organized person. Diagnoses the financial problems of his clients. After work, he rides a motorcycle and sails.