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Market Profile - Value Area and Non-Value Area (Value area is the zone…
Market Profile - Value Area and Non-Value Area
Value area is the zone where maximum trading happens during the day. It is also the zone where the market spends most of the time.
In a Market Profile, 68% of the traded zone is called value area.
This is the most liquid zone for the day. Here is where the player behaviour is a bit different than outside the value area.
A market day can be segregated into two parts as per Market Profile graphc: value area and non-value area.
In value area, two kinds of players come. (1) active players; (2) passive players.
Moreover, in value area, all types of players, such as long term investors, hedgers, speculators, dealers, and all types of players find comfort in trading. Because there is no issue of liquidity on any given day.
However, on trend days we have to be very careful in judging the value area. Because most of the times on trend days (as discussed in day types), the profile is normally thin and liquidity is low at every point literally.
Because most of the real money does not want sigma movements in stocks, they prefer trading only within the value area. However, on certain conditions or days they prefer non-value areas as well.
The central theme of a financial market is liqudiity. It is the only thing that moves a market. Not any other concept such as technicals or news or any other thing.
Usually, value area is the place where maximum bets happen, and hence maximum volume. The value of business is also more here. This is like the central region where most traders are happy trading their inventory. Buyers and sellers can find each other easily here.
Trade facilitation, that is the ease with which buyers can find sellers and vice versa, is the best in value area.
A value area is bounded by a high, called value area high (VAH), and a low called a value area low (VAL). The centre of this zone and the entire day's profile is called the point of control (POC). This is the line where maximum business happens for the day.
Usually on any normal day or a balance day, the distance form VAH to POC and VAL to POC should be ideally same as per the normal distribution. Whenever you are seeing a large diversion in this aspect during the developing profile, it is an anomaly. Remember this for a trading strategy.
A Market Profile is supposed to be a normal bell curve but it is not always because of market anamolies. That is what we need to find always when the profile is not a normal curve.
Value area is a place where both active and passive players are happy. However, more active players are clinging to the edges of the value area when there is a trend day. More passive players are clinging to the edges of the value area on a balanced day.
In summary, the components of a value area are: (1) POC, (2) VAH and (3) VAL. We will understand the behaviour of players around these levels and behaviour of POC during the devleoping day in latter sessions.
A non-value area is the zone that lies between the "day's high and VAH" and "day's low and VAL". This is where the day's high and low (both today and historical) assume importance as reference points for trading.
The non-value area typically has lesser trading and more rejections happen intraday in these zones unless it is a trend day, which sees more acceptance in the non-value area.
In non-value area two things are very important: (1) secured highs or lows/single prints, means where players have very good clarity of what they want. (2) insecure highs or lows/poor highs or lows, where players are usually not confident about a move beyond or away from that level.