01

Value Area Basics

MARKET PROFILE ® The Value Area is a primary component derived

EDUCATION SERIES from the Market Profile® methodology and is
DEFINITIONS intended to show the range of prices that reflect the
most interest on the part of buyers and sellers.
Value Area – The Value Area
represents the range of prices that
contain 70% of a day’s trading The objective is to show traders where “value” is being established
activity. This 70% represents 1
standard deviation and reflects the and provide low risk, high reward trading areas based upon some
area where a majority of the trading simple rules and strategies. One of the most common uses of the
occurred. It can be calculated
value area is to relate the current day’s trading activity to the previous
based upon the TPO count (number
of letters in the profile) or more day’s value area.
accurately using the actual volume
at each price. It is most commonly
referenced to yesterday’s trading One of the best things about the Value Area is the familiar bell curve
and used as reference points for the shape it will many times create. Other times the curve will be skewed,
current day.
but the simplicity the distribution offers provides traders a new way
Time Price Opportunities or This to objectively observe where other market participants are placing
Price Occurred (TPO) – These their trades and help identify areas of value.
are the letters you see on the
profile and traditionally each
letter represents a 30 minute time Once you know a few basic rules you will be armed with a sound
period. So all the letter “D’s”
would represent the range of prices trading strategy that will not go away just because markets change.
traded during “D” period. As the One of the key benefits of learning Market Profile® is that the
market trades throughout the day
strategies are all based upon auction market theory and not a sector
each letter (30 minute bracket or
period) builds upon previous letters or spread relationship that is here today and gone tomorrow. You will
creating a vertical distribution be equipping yourself with a skill set
called the Market Profile®.
that should last all of time. If there is
DISTRIBUTION CURVE
Point of Control (POC) – The price one thing you can count on, it is that
that recorded the most trading
the market will always be an auction Prices above value
activity.
market. When this ceases to exist it
Developing Value Area – The would be advisable to stop trading.
Developing Value Area represents
Let’s all hope this never happens!
PRICE

the range of prices that contain Volume VALUE AREA

70% of the current trading day’s Where 70%
price range. The developing value of trades
area is a dynamic area that changes By learning and practicing the take place.
throughout the day until the day is value area setups listed below you
over. Many traders like to compare
will begin to develop confidence Prices below value
where the developing value area
is in relation to the previous days in your trading and have a sound
value area. See Value Area Trading methodology from which to build TIME
Strategies on the web site for more ©2008 MarketDelta
ideas. upon.
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Scenario 1
OPEN ABOVE
When the market opens above the value
area and is able to hold the value area
high on subsequent tests, it is a strong VALUE AREA

PRICE
“One of the best
bullish signal. If the market begins to trade
things [MarketDelta] within the value area and volume picks
offers ... is the ability up it would be recommended to exit long
to readily see what positions. TIME
©2008 MarketDelta
kind of market we’re
in via the volume bell Scenario 2
curve. When a market opens above the value OPEN ABOVE

area but then begins to trade for two

That was always consecutive brackets back inside the value VALUE AREA

PRICE
something I had area, there is a strong tendency to rotate all
struggled with in the the way through the value area and test the

past - determining value area low.

TIME
when a market was ©2008 MarketDelta
trending vs rotating.
Scenario 3
With that new insight, When a market opens below the value
my trading strategy area but then begins to trade for two
is always matched to consectuive brackets back inside the value VALUE AREA
PRICE

the conditions.” area there is a strong tendency to rotate all

the way through the value area and test the
- Sam, UK value area high. OPEN BELOW

TIME
©2008 MarketDelta

Scenario 4
When the market opens below the value
are and is able to hold the value area low
on subsequent tests, it is a strong bearish VALUE AREA
PRICE

signal. If the market begins to trade

within the value area and volume picks
up it would be recommended to exit short OPEN BELOW

positions. TIME
©2008 MarketDelta
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Scenario 5
When the market opens within the value
area it is showing signs of a balanced
market. Trading from a responsive versus
VALUE AREA

PRICE
initiative mind frame would be preferred. OPEN WITHIN
“This seems to be
what I have been Once the core concepts of Market Profile®
looking for as a final are digested and you have a good TIME
confirmation tool. understanding of some basic Market ©2008 MarketDelta

Profile® trading strategies you will find

it to be very valuable in your trading because of the structure and
I have been keenly
perspective it can provide.
interested in volume
and bid/ask pressure. Key Principles to Understand When
Evaluating the Value Area
This lets you see Initiative Activity – This is when a market opens above or below the
right through volume value area and stays outside of it. IF opening above the value area it

structure. It helped shows traders are “initiating” trading above known value and higher
prices are expected. IF opening below the value area it signifies
me avoid two trades
traders are “initiating” trading below known value and lower prices
and see when to take
are expected.
two other trades.”
– Blair C., British Columbia Initiative Buying - When the market opens and stays above the value
area it should be viewed as a strong bullish signal and moves higher
should NOT be faded. Many times this type of trading activity is a
result of longer time frame traders and institutions who have lots
of buying to do and are able to support prices for the trading day.
INITIATIVE ACTIVITY
Fighting this type of move can be grueling and very unprofitable.
Initiative Buying
Above Value Area “The trend is your friend” is very true when initiative buying is
present. Knowing and understanding the value area can really help
keep you on the right side of the market and from getting run over by
a strong bull market. The best strategy for a day exhibiting initiative
PRICE

VALUE AREA

buying is to buy pullbacks until proven wrong. Sustained probes

back into the value area should be viewed cautiously as the market
Initiative Selling may be showing signs of weakening.
Below Value Area

TIME
©2008 MarketDelta
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“MarketDelta is Initiative Selling - When the market opens and stays below the value
area it should be viewed as a strong bearish signal and moves lower
just about the most
should NOT be faded. Many times this type of trading activity is a
amazing tool I have result of longer time frame traders and institutions who have lots
ever used. of selling to do and will be pressuring prices for the trading day.
Fighting this type of move can be grueling and very unprofitable.
As a former floor Identifying initiative selling by realizing where the current market is
trader, I was used trading in relation to the value area can really help keep you on the
right side of the market and from getting run over by a strong bear
to gauging the
market. The best strategy on a day exhibiting initiative selling is to sell
speed and direction bounces until proven wrong. Sustained probes back into the value
of a price move by area should be viewed cautiously as the market may be showing
observing volume. signs of strengthening.

Responsive Activity – This is when price trades outside the value

I am able to gauge
area and is met with an opposite response and rejected back into
the same patterns
the value area. This type of activity is often present when a market is
and feel that I had trading within the value area and makes an attempt to trade outside
from the floor using of it for a sustained period of time.
this most amazing
program.” Responsive Buying – There are a couple of scenarios that could be
classified as responsive buying.
–Gerard C., Singapore
1. The first scenario occurs when the market opens
WITHIN the value area and makes an attempt to trade
BELOW the value area. Buyers enter the market and
RESPONSIVE ACTIVITY auction price back into the value area. This shows
responsive buyers stepping into a market that is trading
Responsive Selling
Above Value Area below value and taking advantage of the low prices.
This strategy works well in bracketing (sideways)
markets.
PRICE

VALUE AREA

2. The second scenario occurs when the market opens

BELOW the value area and buyers immediately start
Responsive Buying entering into the market. This would be witnessed
Below Value Area
by prices moving higher from the open as buyers
TIME “respond” to price below value. A good initial target
©2008 MarketDelta
would be the value area low. When this type of
responsive buying occurs it is likely the 80% rule come
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CBOT Building into play. Refer to Value Area 80% Rule document on
141 W. Jackson Blvd the website for more information on this strategy.
Suite 3706
Chicago, IL. 60604
Responsive Selling – There are a couple of scenarios that could be
Phone 1.312.922.7800 classified as responsive selling.
Fax 1.312.922.7801

www.marketdelta.com 1. The first scenario occurs when the market opens

[email protected] WITHIN the value area and makes an attempt to trade
ABOVE the value area. Sellers enter the market and
auction price back into the value area. This shows
DISCLAIMER
responsive sellers stepping into a market trading above
The information in the publication,
along with any charts, illustrations, value and taking advantage of the high prices. This
examples, or recommendations are for strategy works well in bracketing (sideways) markets.
educational purposes only and should
ONLY be used as a learning resource
2. The second scenario occurs when the market opens
for studying actions and activities in the
market. ABOVE the value area and sellers immediately start
entering into the market. This would be witnessed
TRADING CAN RESULT IN LOSSES by prices moving lower right from the open as sellers
GREATER THAN INITIAL CAPITAL
“respond” to price above value. A good initial target for
INVESTED AND IS NOT SUITABLE FOR
EVERYONE. trade like this would be the value area high. When this
type of responsive selling occurs it is likely the 80%
Since these examples or strategies rule come into play.
may not have actually been executed
the results shown may be different
and affected by things such as lack of
Balanced Market – Trading within the Value
liquidity at certain price levels or times Area
of day. No representation is being The basic significance of a market trading within value area is that of
made that any account will or is likely a balanced market. It shows buyers and sellers are equally matched
to achieve profits or losses based upon
and facilitating trade at mutually agreeable prices. Price will wander
anything suggested, illustrated, or
shown in this publication. but when it reaches the value area high or low responsive activity is
often present from the longer term time frame market participant.
The authors of this publication are not
providing investment or trading advice
Out of Balance Market – Trading outside the
and do not make claims, promises, or
guarantees than any idea, strategy,
Value Area
video, document, or any other means The basic significance of a market trading outside the value area
of conveying information will result in a is that of an out of balance market in which the value area is being
profit, loss, or any other desired result. rejected. When the market is above or below the value area it is
showing us that either the longs or shorts are currently attempting
THIS IS NOT A SOLICITATION TO to influence the market. A key observation is when the market opens
BUY OR SELL SECURITIES. ALWAYS out of balance and begins to randomly trade back and forth but
SEEK THE ADVICE OF YOUR still stay outside the previous day’s value area. Essentially you are
PROFESSIONAL INVESTMENT
witnessing a market build value outside the previous day’s value area
ADVISOR BEORE MAKING ANY
INVESTMENT DECISION. which would confirm an out of balance market.