Welcome to Market Profile Series. In the last tutorial we seen different types of Market Profile Days and in this tutorial we will be discussing about a simple but very effective strategy based on value area which helps intraday traders to bring a lot of trade conviction.
If you are new to market profile it is recommended to start here How to read a market profile charts
Market Profile – 80% rule which was first mentioned in The Profile Reports (Dalton Capital Management 1987 – 1991). It says if the market opens either above or below the value area and test the value area high/low within 2 consecutive 30 minutes (i.e letter ‘A’ or ‘B’ touches value area) then there is a 80% chance that it will fill up the complete value area.
When the price open above value area and return back to the value area within the first hour indicates the Buyer or Seller are not confident about the direction and soon we can expect the auction to continue fill the complete value area. In the above picture you can see that market opened below previous days value area and reverses the direction soon to test the previous days value area at the letter ‘B’ which activates the 80% rule.
Here is another example in the above picture price opens above previous value area high and touches the value area at the letter ‘A’ however the next 30min price gone outside of the value area. Now to trade this rule one have to wait for the price to revert back to value area again and should trade for next 2 consecutive 30min bars. Letter ‘E’ and Letter ‘F touches the value area high and now one can expect the price to auction towards value area low.
80% rule is also applicable if the market open within the value area in the 2 consecutive 30min bars and moves out of the value area. One can trade this 80% rule if the price reverts back again to value area for two consecutive 30min bars.
However if price opens above/below previous days value area and haven’t return back then it is a sign of one sided directional move
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2 Bracket Rule
2 Bracket rule comes into play when the price open above/below value area and the price touches the value area within first 30min and the second bar trades within the value area then 80% play condition is satisfied and one can look for the value area to get filled up. Conservative traders may wait for the 2nd 30min bar to close but if the markets are faster it will fill the complete area within the available short duration.
In the next tutorial we will be discussing about the different opening types and how it gives more conviction for a day trader on trend direction.