Value Area Analysis In Order Flow Using Orderflows Trader

http://www.orderflows.com/oft6.html

There are a few reasons why the value area is defined as the price range that contains approximately 70% of the volume in Market Profile analysis:

Statistical significance - The 70% level captures a statistically significant portion of the volume and provides a reliable representation of where value was accepted. Going much higher would make the value area too narrow.

Pareto principle - The 70/30 percentage aligns with the common 80/20 Pareto principle or "law of the vital few". This states that roughly 80% of the effects come from 20% of the causes. 70% captures the bulk of volume.

Normal distribution - Volume tend to be normally distributed across prices in liquid markets. The mean and one standard deviation on either side generally captures around 70% of occurrences in a normal distribution.

Historical precedent - The inventor of Market Profile, J. Peter Steidlmayer, empirically determined over decades of market research that 70% of volume gave the optimal balance of relevance without being too restrictive.

Trading activity - 70% represents the prices where the majority of trading activity and market agreement is happening. This suggests higher relevance as support and resistance.

Balance - Using 70% balances having a broad enough range versus overly narrowing down the value area. Going much higher would reduce usefulness.

So in summary, 70% strikes the optimal balance between statistical and practical significance for defining value in Market Profile.

he value area contains the range of prices where the most volume (value) was traded during the specified time period. Typically this is 70% of the total volume.

To calculate the value area, the price axis is broken into fixed intervals (e.g. 0.25, 0.50, etc). The volume traded at each price interval is summed up.

The 70% of volume figure is calculated by ranking each price interval by volume traded. The value area contains the lowest and highest price levels that encompass 70% of the total volume.

For example, if total volume was 1000 contracts and the 70% value area encompassed price levels between $10-$13, this means 700 contracts traded between those prices.

The point of control (POC) is the single price interval with the highest volume. This is like the center of gravity of the value area.

Value areas show where buyers and sellers agree on value during the trading session. The upper and lower value area boundaries often act as support and resistance.

Value areas are dynamic and should be recalculated regularly as new information comes in through trading activity. They give key insight into market participation and value discovery.