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80% Rule for Value Area

mark jackson
asked this on March 08, 2011 12:16

in pdf file:80% Rule for Value Area in scenario #1 I don't understand sentence:
"...If the market begins to trade within the value area and volume picks up it would be recommended to exit long positions." To me it would be indentical to scenario #2...That is why it confuse me...
Just oposite is the same in scenario #4.

Thank you

 

 

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Andrew Stoeckley
MarketDelta LLC
Ajax_loader_small Answer

Scenarios 1 and 2 both consider scenarios when the market opens above value.

In Scenario 1, the market repeatedly bounces off the value area high. This is bullish, and some traders would go long at the value area high. However, if this support level is violated, and the market moves into the value area, then it is wise to exit the long positions, just as in any case where a support levels was penetrated.

In Scenario 2, if the market falls into the value area for 2 consecutive 30-minute bars, the theory is that it will continue to trade down towards the value area low. Some traders would go short in this case.

In both Scenarios 1 and 2, the idea is that if the market opens above value but then trades back down into value, it suggests a downside move.

March 08, 2011 12:21
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mark jackson

Thank you Andrew for respond...So difference between #1:"...If the market begins to trade within the value area and volume picks up it would be recommended to exit long positions." and #2 is that in#2 is explicitly specified :2 consecutive 30-minute bars...and in #1 there is no talk about: 2 consecutive 30-minute bars...Is this correct?

March 08, 2011 15:12
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Andrew Stoeckley
MarketDelta LLC

Part of the problem with the 80% rule in general (and this rule has existed for decades; it is not a MarketDelta creation) is that it is widely open to interpretation. It is not a rule that should be taken too literally.  You can interpret the difference as you suggest, or you can also take it to mean that an aggressive and more risk-tolerant trader might remain long in scenario 1 even after a penetration of the value area high, until a second 30-minute bar forms within the value area.

March 08, 2011 15:15