Value Area

Sources: Towards Data Science and Stock Options Made Easy

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.

In specific, this area is the range where 70% of volume happened in the chosen recent period. You would usually look for areas with a width of about 70% of the total volume or total time (roughly one standard deviation above and below the average highest volume price).


Value Area with Fibonacci levels. Image by Spark Quant


The lower band of Value Area indicator — the thin dotted line painted in lime above the arrow — indicates strong support.  (i) The Cumulative Volume Balance in lime, (ii)  the RSI  showing the market is oversold  and (iii) the not in red cloud on price chart all endorse the long entry shown by the lime arrow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value Areas give you the areas where a defined amount of volume was traded or where price stayed in for a certain amount of time. A volume value area is the area where a certain percentage of the daily volume was traded in. While TPO (short for Time Price Opportunity) value areas are the areas where price spent a defined amount of time.

With this knowledge, there are specific probabilities of market behavior we can understand to digest the value area. The value area gives us an idea of where the smart money is playing ball and where the institutions are guiding the market. From this data, we can derive intra-day strategies that capitalize on market behavior. This idea is derived from a concept known as Market Profiling; you can read about the full context of Marker Profiles on your own.


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.

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.

 

Related content

 

Volume Profile Strategy [ text ]

80% Rule (Market Opening Setup) [ text ]

Value Area — TradeStation Indicators [ video ]

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