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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%
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.
