Failed Auctions Explained: The Best Strategy to Avoid Risky Trades

Hello everyone, it’s Dale here, and in this video, I’d like to talk about failed auctions. Now, if you learn how failed auctions work, it will help you eliminate a lot of potentially losing trades. So, let’s get to it, and let me first explain what a failed auction is.

What the market does is basically one big auction. There are auctions that go up, and auctions that go down, and this process goes on and on. The markets are always in an auction. A successful auction occurs when the price moves in one direction, like here, and then turns and moves in the opposite direction. This is a successful auction. However, a failed auction is when there is not a clear swing point where the price turns. Instead, it looks like this: there are multiple candles ending at the same price level. This is a failed auction because the market failed to complete a proper successful auction, as shown here.

Now, let me tell you what this means in real trading. When you see a failed auction and the price approaches it, the failed auction starts to work like a magnet. It draws the price toward it, and the price tends to test below the failed auction to create a successful auction, because a failed auction is an imperfection. So, when the price comes close, it tends to test it.

In trading, this means that if, for example, you wanted to trade a long position from those heavy volumes here, this would be a long level. However, it would be a very risky level to trade from because if the price pulls back to that long level and you want to go long, it would be risky. This is because below your level, there’s that magnet, and the risk is that the price will just go through that zone and test below the failed auction.

So, what I’m trying to say is if you see a level like this where you have, for example, some support like this one, but below that there’s a failed auction, don’t trade from that level. The failed auction could work like a magnet, and the support could be broken, with the price testing that failed auction. Now, let me show you a couple of examples to make this clearer.

Here, we have a 30-minute chart of AUD/JPY. Let me start from the bottom. Right here, we have a significant volume zone and a possible long level—possible support. You already know what a failed auction looks like, and you can see it right here. This is a failed auction. If the price comes to this level, it could either react to those volumes and go up, but it’s risky to enter a long position here because of the failed auction. This failed auction acts as a magnet, which could cause the price to test and go below where the failed auction occurred. That’s why this is risky and why you shouldn’t take trades like this.

Now, there are two more examples. This is a successful auction here, with a heavy volume zone. This was a support level, and as you can see, below that support, there was a successful auction with just one candle creating the low. This is a strong low and a successful auction. It’s fine to trade from here. There was a pullback, and after some time, a nice reaction. This is the kind of scenario you can trade. On the contrary, a failed auction is something you should not trade.

There’s one more thing I wanted to show you. It’s not exactly a failed auction, but it’s a very similar concept: a weak low. If you look here, again we have a heavy volume zone, which could potentially work as a support. So, if the price comes to that zone, it should react to it. However, if you look at the low below this heavy volume zone, you’ll notice many candles with lows close to each other. Often, there’s liquidity below these swing lows, and if they’re close together, it creates a liquidity cluster. When the price approaches this support, large institutions, which are always searching for liquidity, can easily push the price lower to take out that liquidity. That’s how this works.

So again, when the price comes to this zone, there’s a risk that it will pass the support level to take out the liquidity sitting below those lows. Now, if you compare it to this example here, there were many lows like that, but this last low purged all the liquidity that was stacked here, and then the price moved upwards. This no longer works as a magnet because the liquidity was taken out. But in the earlier example, the liquidity below those candles hasn’t been tested yet. It’s still there, acting as a magnet. So, if you want to go long from this level, it would be risky, and I wouldn’t recommend it due to the liquidity cluster.

This is a concept very similar to the failed auction. Both scenarios act like magnets, and you should be aware of that. The next example is on NZD/USD. Here, there was a failed auction, and it had already been tested. Let me show you. This was a heavy volume zone, and normally, I would like to trade long from here. But as you can see, let me zoom in, we have a failed auction here. All the lows of these candles are at the same price level, so that’s a failed auction. As I mentioned, the price likes to test that, as it did here. The price went past it, and only after it took the liquidity below that failed auction did the price turn upwards. But if you had a long level at the start of this heavy volume zone and tried to go long from there, you would have taken a losing trade because the price wanted to test that failed auction—this magnet.

Alright, so this is exactly the kind of losing trade you can avoid if you understand what failed auctions and weak lows mean.

Now, let’s look at CAD/JPY. There are two viable levels based on the Volume Profile. This support right here, based on those heavy volumes, is a good level to trade from. I wanted to show you that below this heavy volume zone, there’s a strong low, and that makes the level a good one to trade from. There are some wicks below it, but they’re far apart, so this is not a magnet that would attract the price. If it were more clustered, then yes, but in this case, it’s fine, so this level is good to trade from.

Also, there’s another level that I’d like to trade from, and that’s this heavy volume zone. If you look at the lows, there’s this one, but it has been purged. Then there’s this one, and it’s also been purged. So, there’s no magnet below this zone, which makes this level good to trade from.

Now, the last example is on NZD/JPY. There are three levels here—two good ones and one bad. Let’s check them out one by one. First, this level. Let me show you the Volume Profile. This is a heavy volume zone, and if you look at the low, it nicely purges all the liquidity that was stacked there. This creates a strong low, and this level is good to trade from. The second level, based on these volumes, is a bit risky. If you look at the lows, this is what I call a weak low. Many traders are probably placing their stop-loss orders below these candles, so there’s a lot of liquidity sitting here. This creates a liquidity cluster or stop-loss cluster. In this case, a long trade from here would be risky because this represents a magnet, and the price might tend to test it. So, this is a trade I would avoid.

The third level is a bit tricky. Let me show you the Volume Profile. We have this heavy volume zone, and if you look at the lows, there’s a failed auction here. The price might want to test it, but it’s very close to the level. I wouldn’t mind if the price goes past the level and tests this failed auction because my stop-loss would be here, below this strong low. This is a successful auction, and it should hold, so this level is still good to trade from.

Alright, let me quickly summarize. Here’s a perfect example of a failed auction on USD/CHF. This is a failed auction, and you should always be aware of it when you see something like this. Then there’s the concept of a weak high or low, like in this example here. This is a weak low with a lot of liquidity, and you don’t want to trade that either. Lastly, there’s the concept of a strong low, which we saw earlier, and that’s good to trade from.

So, that’s about it. I hope you found this useful. This is actually a concept we talk a lot about in our live trading room every day at the Funded Trader Academy. The Funded Trader Academy is where we turn traders like you into funded prop firm traders in less than 12 months. If you’re interested in learning more, you can visit our website. I’ll give you the link in the video description below. On the website, you’ll find a video that shows everything included in the Funded Trader Academy. If you want to learn more, you can also book a call, and one of our traders will walk you through the service and help you decide if it’s right for you.