Saturday, September 27, 2008

MP Value Area Rule (80% Rule)

As cleon pointed out in the prior post the Value Area Rule  is typically stated as:

If the market opens outside the prior day's Value Area and trades within that VA for two (consecutive *) half-hour periods, then the market has a good chance (frequently quoted at 80%) of filling that entire VA.

* Mind over Markets (p279) does not state the half-hour periods must be consecutive, just that the market show acceptance by printing inside the VA during two half-hour periods.

Day Session ES from 10th April 2008

Trading Days: 119

Open outside prior day Value Area: 76 (34 Above, 42 Below)

Two half-hour periods (double TPO) within prior day Value Area: 41

Completely filled prior day Value Area: 16 (39%)

Two consecutive half-hour periods within prior day Value Area: 40

Completely filled prior day Value Area: 16 (40%)

Completely filled prior day Value Area in single prints: 3

Obviously this is far from an extensive sample size and therefore the reliability of these stats is open to question.

However, the stats are consistent with Dalton's view in Mind Over Markets (p280):

“If a trader enters a Value-Area Rule trade without evaluating other market conditions, the probability that price will trade all the way through the value area is little better than a flip of a coin. 

"The power of the Value -Area Rule lies in your interpretation of surrounding market conditions. Through an understanding of the confluence of balance, value area width and market direction, you can identify the situations during which the Value-Area Rule offers a high degree of reliability.”

I will update theses stats in the future, if they change markedly.

 (It should be noted that the Value Area on any given day can vary across quote vendors i.e. CQG, eSignal, CISCO, Aspen, WindoTrader / Photon etc.)


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