The Value Area
and
The 80% Rule

Share



Introduction

The Value Area and the 80% rule can be an excellent tool for judging market direction.

The Value Area is an outstanding measure of market direction and trend. As the saying goes 'the trend is your friend' meaning one trades with the trend, and not against it. The trend is of great importance to traders. Therefore, having a tool to help correctly identify direction in the market is accommodating in regards to identifying and placing higher probability trades and potential turning points in markets to find ideal stop placement.

value area

From the basic building block of the Value Area, it is possible to open up a new way of looking at the day's trade and find no less than five clear market signals based on this key range that can hint at the potential overall bias for the day's trade.

What is The Value Area?

The Value Area is a measure of where heavy trading volume takes place and is used in trading to determine potential areas of support and resistance. When trying to find clues to market sentiment in historical price charts, first check out the previous day's trade. The trading range from the last session can offer up a key area for traders to observe - the Value Area. Find that range of prices and find the key to the potential for the following session. 70% of the day's price action is conducted inside the Value Area. The Value Area is dynamic and will change throughout the day.

Example 1:- If the Value Area in the S&P's is 1385.00-1390.00, then 70% of the previous day's volume took place between the prices of 1385.00-1390.00.

Example 2:-

graph of value area

*Past Performance is not necessarily indicative of future results.



80% rule

The 80% Rule:

The 80% rule is easy to understand. This is when the market gets (or opens) above or below the Value Area, and then gets in the Value Area for two consecutive half hour periods. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. You will find (once you get used to it) that using the Value Area each day will be very valuable in your trading.

With that in mind, a good strategy is to try and ride the market as it fills the value area. There are two scenarios to watch for:

* If the market opens above the value area and then gets in the value area for two consecutive brackets, there is an 80% chance of the market filling the value area.

* If the market opens below the value area and then gets in the value area for two consecutive brackets, there is an 80% chance of the market filling the value area.

Two Consecutive Brackets: When looking at a 30 minute bar chart, if the market is in the value area for one bar, and when the next bar opens, if the market is still in the value area, the market has then been in the value area for two consecutive brackets. This is the time to watch for the 80% rule.

Important Exception to the 80% Rule:

The market does not have to open above or below the value area to have the 80% rule come into play. Here's why:

1) If the market opens in the value area, and then gets either above or below the value area, you can still have an 80% rule.

2) Once the market has moved above or below the value area, and then gets back into the value area (for two consecutive brackets or 30 minute bars,) you then get the 80% rule. When this happens, it's as if the market had opened above or below the value area. The market now has an 80% chance of filling the entire value area (even though the market didn't open above or below the value area.)

Some Important Things To Remember About the 80% Rule when the market has opened above the value area and then gets in the value area:

When the market gets into and stays in the value area for two consecutive brackets, that is the time to look to get short (looking for the market to move lower and fill the value area.)

You need to try and get short as close to the top of the value area as possible because your protective buy stop should be above the value area. Here is why that's important:

1) you want to take as little risk as possible, so the closer you can enter your short position to the top of the value area, the better.


exit point

2) You don't want to get short too close to the bottom of the value area because your objective (exit point) is the bottom of the value area. It certainly wouldn't be smart to try and get short very close to your objective, because the risk to reward ratio is not very good.

3) In this scenario, the market will often give you a chance to get short at the top of the value area. If you miss your chance to get short near the top of the value area, you will usually not attempt this trade. Remember, the further away you get short from the top of the value area, the more risk you must take because the correct place for your buy stop should be above the value area.

When the market has opened below the value area and then gets in the value area:

When the market gets into and stays in the value area for two consecutive brackets, that is the time you will look to get long (looking for the market to move higher and fill the value area.) Here, again, you need to try and get long as close to the bottom of the value area as possible because your protective sell stop should be below the value area. Here is why that's important:

risk

1) You want to take as little risk as possible; so the closer you can enter a long position to the bottom of the value area, the better.

2) You don’t want to get long too close to the top of the value area because your objective (exit point) is the top of the value area. It certainly wouldn't be smart to try and get long very close to your objective, because the risk to reward ratio is not very good.

3) In this scenario, the market will often give you a chance to get long at the bottom of the value area. If you miss your chance to get long near the bottom of the value area, you should probably not attempt this trade. Remember, the further away you get long from the bottom of the value area, the more risk you must take because the correct place for your sell stop should be below the value area.

resistance numbers

Excellent Support and Resistance Numbers!

It is a good idea to use the top and bottom of the value area as support and resistance numbers. For instance, if you were long above the value area, you could put a sell stop just below the top of the value area because if the market got into the value area, it would cancel out the bullish signal. And, if you were short just below the value area, you could put a buy stop just above the bottom of the value area. If the market gets back into the value area, it cancels out the bearish signal.

The reason to put your stops just inside the value area:

Most futures markets (especially electronically traded markets) are very volatile. You've got to think of support and resistance numbers as an area and not just a single price. If you place your sell stop at the very top of the value area (if you're long) and at the very bottom of the value area (if you're short) then you run the risk of getting stopped out of the market if it only touches the bottom of the value area instead of actually trading back into the value area. You need to see if that particular level will hold, not necessarily, just that one price.

Conclusion

market direction

The value area is something to watch every day. It's an excellent gauge of market direction, and you should always be aware of it. The 80% rule can be very profitable once you get used to it. (But remember, 80% means it will work 8 out of 10 times, not 10 out of 10. So make sure you always have your protective stop in place to protect yourself.)

The other thing that is important is about Initiating Activity. If the market opens above the value area and can't get inside the value area, this is when you get initiating buying. This does not mean that the market will go down! The market can go any way at any time. (If there are more sell orders, it will go down, it's that simple.) But when the market opens above the value area (and you can't get in) there is a better chance that it will go up. So, looking to buy breaks and get long will be your best chance for success.

And the opposite is true. If the market opens below the value area (and you can't get in) the market can still go up if there are more buy orders. But in this case, looking to sell rallies to get short will be your best chance for success.


Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


Share



”Success is simple. Do what's right, the right way, at the right time.”


Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



Take control of your future prosperity the Easy way. Become a member of Stock Options Made Easy today! 


Back to Home Page from The Value Area



Search Stock Options
Made Easy



Enjoy Relaxed or Fast-Paced Trading? Choose your Membership Style...

Whether you prefer to take a laid-back approach to your trading,

or to charge ahead in your options trading,

 Stock Options Made Easy Armchair Trader and Cut-to-the-Chase Trader Memberships put everything you need to succeed at your fingertips for just  $39 or $79 per month.






Subscribe to our FREE
newsletter for all the latest options news!


Enter Your Email Address

Enter Your First Name