Afternoon,

I have been using the value area for some time and thought it would be good for me to write a post on how to use it. First, the value area is the area where 70% of yesterday’s trading took place. Why is that important? Because the bigger traders use the value area and as a smaller retail trader, knowing that can make the difference between being profitable and not. There is some terminology that a new “value area” trader needs to know.  

• Initiating Activity: When the market opens above (or below) the value area and does not get inside the value area.
• Initiating Buying: When the market opens and stays above the value area, this is a strong bullish signal. When this happens, you have dealer and institutional buying going on in the market. When the dealers and institutions are long, you don’t want to put on a position opposite of what they are doing. The best chance to profit on a day like this will be from the long side. Buying breaks (dips in the market) to get long will be the best strategy. In fact, I would say that when the market has opened above and stays above the value area, you should be afraid of being short.
• Initiating Selling: When the market opens and stays below the value area, this is a strong bearish signal. When this happens, you have dealer and institutional selling going on in the market. When the dealers are short, you don’t want to put on a position opposite of what they are doing. The best chance to profit on a day like this will be from the short side. Selling rallies to get short will be the best strategy. In fact, I would say that when the market has opened below and stays below the value area, you should be afraid of being long.
• Activity: The opposite of initiating activity. When the market is above (or below) the value area and does get into the value area.
• Responsive Buying: When the market opens below the value area and buying starts coming into the market (in other words, the market starts moving higher when it is below the value area.) Buyers are “responding” to the market being below the value area and they are attempting to buy the market cheap, thus pushing the market back towards the value area.
• Responsive Selling: When the market opens above the value area and selling starts coming into the market (in other words, the market starts moving lower when it is above the value area.) Sellers are “responding” to the market being above the value area and they are attempting to sell the market at higher prices than yesterday.

The Top and Bottom of the Value Area are

Excellent Support and Resistance Numbers!

The bottom line to the value area is that if the price is inside the value area, the institutional traders beleive the market is fairly valued. A break above/below the value area means that the institutional market participants think the market is not fairly valued and that area needs to be adjusted.

I am going to start putting the value areas in the daily up-date beginning with today’s post. Put a horizontal line on your chart for both areas (I use a black line for the VA low and a white line for the VA high) and start watching how the price reacts around those areas. You will be amazed.

Here’s to helping you catch more fish!

Best regards,

Ron

This is not a solicitation to buy or sell. 
There is a risk in any investment.