We still believe this is the best way to read price action. In fact, we would go so far as to say that it is the best way to integrate the ideas out of behavioral finance into a way to actually trade the markets. Put simply, being able to easily see the areas of congestion versus thin trading gives you a clear picture of what other people are thinking – and doing. This is really all you need to extract alpha out of the market. It is also where most traders (and portfolio managers) miss out. It is all too easy to think of the market as a series of numbers or bars… but it really is a series of human decisions which are simply reflected in the bars.
The crisis (gee that word is getting really old) that we are in now is a great example of how the series of human decisions, some based on numbers and some based on fear, cause an asset to be priced at what it is – at least until a new series of decisions ensue. If you want to judge how much is rational and how much is irrational, does it really help? What you need to know is where others think there is value – and auction market theory allows you to do that.
The trick is what tools best assist in understanding human decisions? We all have essentially the same data – but how we choose to interpret it and what we choose to do with the interpretation – is the harbinger of our results.