The Value Area

by Larry Levin


When trading the value area, beginners can initially find it to be an odd idea that comes in several forms; yesterday's value area that is used in the current day's trade and today's developing value area. We call the current day's developing value area the "intra-day value area" (IDVA). With time, however, it makes perfect sense.

The value area come from Market Profile?, which was developed by the Chicago Board of Trade and J. Peter Steidlmayer in 1982, combines price, volume, and time data into a statistical histogram, with distribution represented by a vertical bell curve. The meat of the bell curve contains 68-70% of the volume and is called the value area. The value area can come in either tic or volume form - volume being the best.

Without going into too much detail, the idea behind the value area (VA) is to determine which group of prices was deemed fair that day. Subsequently, we can make a determination the following day if the market is still "fair," a good deal, or overpriced. For example, when a market is trending higher, prices that trade below the value area are often considered a "bargain" by many traders and the market is supported below the VA - provided that there isn't earth shattering new news.

When Lehman Brothers was getting hammered it was believed to be going out of business because of its irreparable balance sheet. No news was able to turn that ship around so whenever it traded above the VA, it was considered a "bargain" by the short sellers, as well as the longs who wanted to exit at a decent price. LEH finally reached its final "fair VA" when it reached zero, however, this is an extreme example.

This brings me to today's trade that I wanted to talk about. The low range of yesterday's VA was 971.50. Although there was some bad news today (consumer confidence) that drove the market below yesterday's "fair value," the news wasn't earth shattering; therefore I wasn't surprised to see it make a nice bounce from the low.

When the ES was trading near 969.00 things got interesting; there was a buying tail on the chart, the market started consolidating, and was near today's IDVA low...all supporting a long trade. At the time, the IDVA low was 968.00. The trading room was prepared to buy 967.75 but temporarily canceled it as some selling started driving down the bid. That selling, however, shut off like a light switch at 967.50 and buyers started lifting the offer. When HUGE buying started hitting the tape at 968.00, the students in the virtual trading room bought it too.

Because of all the aforementioned reasons, multiple positions were bought and we were greeted with an instant pop. So in the end it was a combination of yesterday's VA, how the market traded off the low, today's IDVA and our live-volume Market Profile chart helping us "read the tape," that lead to a quick +5.00 point winner.

If a genuine 1965 Shelby Cobra was quoted at auction for $1,000, wouldn't you want to buy too? (That's about $15-million below its current "fair value.")



Previous Day's Trading Room Results:

Trade Date: 7/28/09

E-Mini S&P Trades*
(before fees and commissions):

1) FT sell @ 10:50am at 969.00 = +1.50 (1 lot)

2) IDVA buy @ 12:00pm at 968.00 = +1.00, +2.00, +2.00 (3 lot)

3) FT buy @ 1:55pm at 974.00 = -.25 (1 lot)

4) Algorithm positions (8)

5) "Reading the Tape" positions (14) ...combined Secret's, Algo, & "Reading the Tape" total...+20.00


Electronic (YM) Mini-Dow:

1) None today



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