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Volume Profile Value Area Definition?
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Volume Profile Value Area Definition?

  #1 (permalink)
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Volume Profile Value Area Definition?

Hi guys,

I'm looking for the exact definition of what the value area of the volume profile is? Any help here is much appreciated!

Thanks,
Revv

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  #3 (permalink)
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Revv View Post
Hi guys,

I'm looking for the exact definition of what the value area of the volume profile is? Any help here is much appreciated!

Thanks,
Revv

Hi Revv - this forum has an automatic system that recognizes certain keywords and provides the answer.

If you go back to your original post you will see 'value area' has been highlighted. Click on that and you will get a definition.

Hope it helps.

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  #4 (permalink)
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I am affraid that there is no exact definition.

There are various ways (algorithms) to calculate the volume profile value area, like VOC, TPO, VWTPO ,VTPO ..

Most of the algorithms also allow you to choose the % for the VaB and VaT, 70% might be a general accepted value

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Thanks guys. Appreciate your help!

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Volume based value area is a walk up and down the profile following the larger uncovered volume until 70% of volume (or more) has been covered.

You start at the POC then look at the 2 levels either side. You add in the 2 highest levels.

Then you look at what's remaining outside of the area you already took into account and look for the 2 highest again.

Then you carry on till you have covered 70% of volume.

Apparently, the person that thought it up was on LSD at the time.

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What is VAb and VAt?

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YGRYGR View Post
What is VAb and VAt?

the bottom and the top of the value area
the value area generally being that part of the chart where 70% of the volume was traded
starting from the POC, going up and down until you embrace that 70%

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Ahh bottom and top! Should have realized! Thanks for the super fast answer!

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Revv View Post
Hi guys,

I'm looking for the exact definition of what the value area of the volume profile is? Any help here is much appreciated!

Thanks,
Revv


Let me add a few words to explain the concept of value area.

The most common measure of dispersion is the standard deviation. In the Gaussian world of normal distributions the range [mean - stdDev, mean + stdDev] contains about 68.3 % of all data points.

Applied to trade transactions: If prices were normally distributed around the mean (they are not, but it is so easy to calculate the standard deviation), then 68.3 % of the daily trade volume would be contained within the first standard deviation bands of the volume-weighted average price (volume-weighted mean) of the day.

Today all this is easy to calculate, but it was not easy when the concept of the value area was introduced.


Market Profile and Value Area

When the concept of market profile was introduced in 1985 bei Peter Steidlmayr (CBOT), PCs were not readily available to allow for exact calculations. Therefore the value area was calculated from time price opportunites that were taken from 30 minute bars. The concept was only applied to the regular trading hours. Time price opportunities (TPOs) do not take into account volume, but it is basically a bar count for each price level throughout the trading session.

The 70% suggested by Steidlmayr came close to 68.3%, the value favored by the academic world. However, if you compare his method to the basic concept mean +- 1 standard deviations, there are differences

-> trading prices are not at all normally distributed
-> volume was not available real-time, therefore he used time-price opportunities
-> he did not build his value area around the mean but used the mode (price level with the highest number of TPOs)

If you want to know the exact method to calculate a value area from TPOS, then look into Appendix 1 of Jim Dalton's book "Mind over Markets". It is well explained. It is basically a TPO count starting from the mode (which is called point of control).


Shortcomings of the TPO method

The main problem with the TPO method is that it does not take into account volume. In particular it should never be applied to a full session, as it overweights low volume periods such as the night session. Also the 30-min resolution used by Steidlymayr was a result of low computing power.

Today there is no point in using TPOs with a low resolution. You would use VWTPOs from high resolution bars, at least 1-min bars, or you may even use 1-tick bars. High resolution VWTPOs can be used for both the regular and the full session.


Alternative Methods

There are 3 basic methods that can be used to calculate the value area for a session.

-> original method developed by Steidlmayr (calculated around mode = point of control)
-> classical method that uses the standard deviation (calucated around the mean = VWAP)
-> another method based on the mean absolute deviation (calculated around the median)

All of these methods have merits, in the end it depends on what you look for. Steidlymayr's point of control is a high volume node, but can be far from the day's average price. So it may not be as good a trendfilter than the value area taken from mean and standard deviation. But it may provide for good support or resistance as a volume node.

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