When is a Computed Value Area Valid?

[AldPixto 10]

Think - What is the intent of the value area?

 

The value area is the range of prices where the majority (70%, 68.2%...) of trades occur.

 

So - Given a dataset with trades (date/time, price, lot-size) I can easily compute a POC-TPO style value area or a Volume-Weighted value area, right?

 

Yes, the numbers can be computed, but they lack meaning when the dataset contains multiple distributions or even a single distribution that lacks rotation.

 

What? What? What?

 

Consider multiple distributions, the most simple example is a day with congestion and price rotation around some set of prices, then a midday fast far away from the earlier prices followed by congestion and price rotation around the new price area. A volume profile would show two distribution peaks with little volume between. A market profile would similarly show two distributions with single prints between them. The computed value might be between these two distributions. The value area POC or Mean, value high and value low reference prices are meaningless.

 

Consider a single distribution from a day in which price had micro-rotations (e.g. up a few ticks, down a few ticks) during the entire day, however the majority of 30-minute periods price made higher highs, higher closes, and higher lows. This is a trend day. Each time we compute our MP reference prices they are moving higher (that is significant) but as far as producing levels from which to trade the computed value area is of no use.

 

Think - What kind of day has a value area?

 

The volume or TPO distribution should have a central high area and low edges. We could have an idealized bell curve, but an asymmetric blob is more likely. The high volume area can be near the top, middle, or low.

 

There should be some price rotation occurring around the high volume areas. As a general guideline, I want the value area for the ES,ZB,and ZN to have prices with five or more TPOs. I adjust the threshold for other markets, e.g. four or more TPOs is sufficient for ags (corn, soybeans, wheat). Some authors use the term balance or bracketing to mean a market with price rotation.

 

Conclusion - Keep in mind that just because we can compute a value area, that doesn't mean we have useful numbers to trade with. Markets that are consolidating or congesting have value areas. Trending markets do not.

[BlowFish 10]

You might find Jperls threads trading with market statistics intresting. This is discussed there. He rather interestingly uses the skew of the distribution to determine trend. You can get by just reading the first post in each thread if they look a bit daunting .

 

Time based profiles and TPO's have no real statistical significance but may (or may not) be OK as an heuristic method. having said that I think they probably have become 'self fulfilling' which can add further value (if you will pardon the pun!)