This is a good read about auction theory: http://www.mysmp.com/stocks/auction-market.html http://www.mysmp.com/stocks/auction-market.html It's easy to simplify

This is a good read about auction theory: http://www.mysmp.com/stocks/auction-market.html http://www.mysmp.com/stocks/auction-market.html It's easy to simplify though... imagine that all trades for anything, happened between $1 and $10. Now imagine a graph from bottom to top, starting at the bottom($1) and ending at the top($10). Horizontally, draw a bar next to each price, and the width of the bar should represent how many trades happened at each price. In my poorly drawn example below, you can see 2 trades happened at $1, while 4 trades happened at $3(more than any other price). Auction market theory says that the price is likely to return to $3, since that is where the majority of business was done. So to trade based on that, you are looking to sell at $5 and buy at $1, in anticipation of the market moving back towards that center of $3. It's a gross oversimplification, but that's the heart of auction theory. $5 ++ $4 +++ $3 ++++ $2 +++ $1 ++