“Value zone” is a concept I read on a forum, so what is a value zone?
It refers to a price range in which most of the trading volume in the previous trading day occurs.
More specifically, this area, which accounted for 70% of the previous trading day’s volume, is about the price of the highest volume and is within a range of ¡À 1 standard deviation.
Value zones give us a sense of where the so-called “smart” money is working and where institutions are guiding the market.
From these data, we can derive an intraday strategy that takes advantage of market behavior.
Like other common strategies, this is a very practical way to build a policy.
In addition, we have done some backtesting of the strategy, but it does not seem to achieve the 80% probability that the authors of this strategy claim.
But it could be closer to 65% plus.
However, it’s hard to find scenarios where the 80% rule really comes into play.
We do not deny that trading value zones can be profitable, however, it is also a challenge that this rule is not as easy to recognize as it may seem.
Perhaps a sophisticated system or algorithm can better control this mode of operation.
But that doesn’t stop us from understanding how this strategy works.
The 80% rule says that when a price falls out of the value zone and reenters it twice in the next two and a half hours, there is an 80% chance that the value zone will be filled.
If the market opens above the value zone and does not return within it, this is a strong bullish signal.
However, if the market opens above the value zone and returns to the value zone, it is clearly back in the volatile action.
In fact, it’s a bit like a fake breakout, except the strategy is quantified and comes up with an 80% rule.
Similarly, if the market opens below the value zone and does not return to it, it is a bearish signal.
If the market opens below the value zone but returns to it, this is a bullish signal.
The two graphs above clearly satisfy the 80% rule.
This rule works because it represents the position of agency funding.
When the market opens above or below the value zone and stays above or below it, it is a sign that institutions are buying.
Markets are, by their very nature, pure.
When there are more buyers than sellers, prices go up.
When a seller is dominant, the market goes down.
Yet it is too difficult to understand all the factors that influence market behaviour.
Based on the 80% rule, we can make some interesting observations about the market.
Simply put, a consolidation within a value zone is a sign that the market is in balance.
There are roughly the same number of buyers and sellers.
Ideally, buying or selling at the top and bottom of the price zone and placing a stop loss is the best way to move in a volatile market.
If the price falls out of the value range, we can cut our losses quickly and avoid further losses.
If prices follow the 80% rule, we can profit from filling the value area.
The chart below shows an example of trading through the value zone.
We can see that the price has broken out of the previous day’s trading range and has not returned to the value area that we are most comfortable with, therefore, we do not participate in the trade.
In the second trading day, we saw the range of price fluctuations of the variety, basically in line with the 80% rule.
You can see more than once that the price fell below the value zone and then returned to the value zone.
Whether you trade algorithmically or manually, you must set a strict stop loss.
Stay disciplined, follow your strategy, and don’t let your emotions guide your trading.
It is interesting to study these different strategies and see how they guide the daily behavior of traders. Through the strategy backtest, we can understand the reflection of trading psychology in different market environments.
This strategy actually came across in a quantitative finance forum. At first, I just thought the concept of value zone was interesting.
Then, I found some data and carried out a simple backtest of the strategy.
Of course, backtest data is obviously biased, and generally not as beautiful as the data suggests.
Moreover, I have always felt that quantitative trading has its limits, and traders have more potential to achieve their own breakthrough in trading.
