What is value area?

Value area is a concept that we all use in trading, either knowingly or unknowingly. We look at value area as a distinct concept and understand what value area is in trading. Remember, the value area is about trading and it applies to all asset classes including equities, commodities, derivatives, and currencies. Of course, for simplicity, we will restrict our discussion on value area to equities.

The concept of value area is based on the concept of normal distribution. We will not into the nuances of normal distribution but what it effectively says is that in any normal distribution, 68.28% of all the variables will fall in the range of (Mean +/- 1. Standard deviation). Standard deviation measures volatility. The value area is based on this concept since it assumes that nearly 70% of all buying and selling trades fall in a particular recognizable area, which we will refer to as the value area for our understanding. Let us first understand what is value area and then move to its application in trading.

The analysis and interpretation of Value Area

Here we shall focus on value area as a part of volume profile analysis which measures the area where most buying and selling volume (70%) took place. This is volume clustering and it happens in the value area. Normally, you look at the value area of a particular trading session to highlight the 70% trade area.

Broadly, the analysis and interpretation of Value Area are segmented into 3 parts viz. Value Area High (VAH), Value Area Low (VAL), and Value Area Point of Control (VPOC). The VPOC (we will use abbreviations for simplicity) shows one price level at which the most amount of volume was traded. The VAL and the VAH define the range of the value area. Having understood value area and the 3 components of value, let us look at value area trading.

First, the steps to calculate the value area.

1. The first step is to take the aggregate of buy and sell volumes in a trading day and multiply it by 0.70 to get 70% of the volume range.

2. The greatest volume block will also become your point of control or POC. After that, you must add the volumes of the first two blocks above POC and the first two blocks below the POC.

3. The next step is iterative. You add to the POC, the total volume, which is greatest between the two volumes at points 3 and 4. Repeat steps adding a larger of 2 to the value area

4. This iterative process must continue till your Value Area slightly surpasses the number found as the highest volume block.

5. Now, the highest row in Value Area represents the Value Area High (VAH) while the lowest row in the Value Area represents Value Area Low (VAL).

Finally, let us look at what this 70% value area tells you. Institutions like mutual funds, pension funds, and FPIs execute large volumes. Hence their trading action normally results in the accumulation of large orders, so you get this picture. While this may not always be true, supports and resistances get created where such value area gets created.

This value area study helps you to clearly distinguish thin volume areas and value areas. Normally prices move quickly through thin volume areas. For intraday traders, the opportunity is that they can bet on the fact that when price moves from the value area levels and go into thin volume areas, price tends to move real fast to the next value area. This throws up short-term trading opportunities.

Who is eligible for day trading?

There is nothing like eligibility criteria for day trading. If you can bring in capital and manage your risk properly, you are perfectly cut out for day trade. The only condition is that you don’t try to beat the market, rather try to trade the market trend. To be able to consistently trade for the longer term, stop losses and profit targets are a must. Day trading is slightly higher risk and high adrenaline, so you must be capable of taking these pressures.

What is value investing?

Value investing entails identifying a stock that is fundamentally attractive and then buying the stock at a deep discount to the intrinsic value. Value investing focuses a lot on the margin of safety, which is the positive gap between intrinsic value and market price.