We know that the purpose of the exchange is to facilitate trading between buyers and sellers. Auction market theory is a basic stepping point to understand how the auction happens among the buyers and sellers.
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When the markets open interaction between buyers and sellers kick starts and the buyers and sellers will start finding what is the fair price for the day. As the price moves up, it brings in more buying or, as the price moves down, it brings in more selling.
The market auctions up until there are no more buyers. Then it reverses and moves down until there are no more sellers.
When the market can’t facilitate trade on the upside, it will generally test the downside. When the market can’t facilitate trade on the downside, it will generally test the upside.
Price discovery set out what sellers are willing to accept, and what buyers are willing to pay. Price discovery is concerned with finding the equilibrium price that facilitates the greatest liquidity for that asset.
Price Discovery is largely driven by supply and demand. It is a useful mechanism to gauge whether an asset is currently overbought or oversold. It can help you assess whether buyers or sellers are dominant in any one particular market
In the above video we had done a detailed explanation of how the price discovery happens on a day to day life. If you are so interested in how the price discovery process and how to visualize using market profile then you should check out the video.
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