How do MADLevels work?
To understand MADLevels, one needs to first understand Auction Market Theory. Basically, Auction Market Theory proposes that a financial market operates like an auction market, whereby buyers and sellers engage in the competitive auction of a financial instrument. As a result of such auctions, price moves.
For more detailed explanations of Auction Market Theory, please join our Discord group and refer to the video in #videos
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Bid/Ask
Under Market Auction Theory, buy orders placed by buyers join a queue. The buy orders with the highest bid price get bumped up to the front of the queue. At the other end, sell orders from sellers also join another queue, whereby the sell orders with lowest ask price get bumped to the front of the queue.
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The market functions to match orders of the highest bid price with orders of the lowest ask price. The difference between the highest bid price and the lowest ask price is called the bid/ask spread. Orders are transacted within the bid/ask spread. If a financial instrument is liquid (lots of buyers and sellers), the bid/ask spread is very narrow. If a financial instrument is illiquid (very few buyers and sellers), the bid/ask spread is wide.​
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Aggressive Orders vs Passive Orders
Buyers and sellers can be divided into 2 groups: aggressive or passive.
Using buyers as an example, aggressive buyers are the buyers who have more urgency. They use market orders to cross the bid/ask spread to buy at the ask price and place more priority on getting into a long position than the price they pay.
The passive buyers, on the other hand, use limit orders. They place more priority on the price they pay than getting into the long position.
Many retail traders wrongly assume that institutions are aggressive buyers/sellers. In actual fact, institutions are often passive buyers/sellers because this allows them to to fill large quantities of orders at good prices, which are impossible if they are aggressive buyers/sellers.​
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Absorption
Now imagine there is a large number of aggressive sell orders hitting the bid price. This will push the price down until it reaches a price level whereby the price hardly moves. This is called absorption.
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Absorption happens because although there is a large aggressive sell volume here, there are also passive buy orders at the opposite end buying up the sell orders, a process known as accumulation. The buyers are happy to buy up (accumulate) whatever the sellers sell to them as the buyers view these prices are at a bargain. These buyers are usually the big money like institutions.
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MADLevels detects such absorptions and broadcasts them as real time alerts.
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