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Trading Tip #13: How to Pick Intraday Market Direction – the 80% Rule

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Let me introduce you to one simple technique I've used to pick intraday market direction with 80% accuracy.

 

Would you like to know if a particular trade has an 80% probability of working? Would you like to know exactly where to enter that trade, and where to exit? Would you like to trade this technique with a 2 point stop loss or less?

 

It Doesn't Matter if the Market is Going Up or Down, This Simple-to-Learn Method Has a Historical Accuracy of 80 Percent!

 

Using just two key numbers each day, floor traders and other professionals can try to pick the direction, entry price, stop loss and target price of a particular trade. It doesn't matter if the market is going up or down - this simple to learn method has a historical accuracy of 80%. In fact it's called the 80% Rule.

 

Each morning you will know what those two key numbers are. Then, if the set up is correct, simply enter the trade, set your stops, set your target price and sit back with a trade that has an 80% expectancy of hitting the target. What could be easier?

 

Here are the basics for the 80% Rule:

 

The Value Area (Secret Tip #12): The range of prices where 70% of yesterday's volume took place. For instance, if the value area in the S&Ps is 115800-117200, then 70% of the previous day's volume took place between the prices of 115800-117200.

The 80% Rule: When the market opens above or below the value area, and then gets in the value area for two consecutive half-hour periods. The market then has an 80% chance of filling the value area.

 

theMarketIsNowInTheValueAreaForTwoConsecutive.jpg

 

The value area and the 80% rule can be excellent tools for judging potential market direction. Many traders familiar with the value area and the techniques that go along with it use it to help them decide what trades to do each day.

 

A couple of key points to remember:

 

If the market opens above the value area, try to enter a short position as close as possible to the top of the value area.

Conversely, if the market opens below the value area, aim to enter any long position as close as possible to the bottom of the value area.

 

Once you get used to it, you will find that using the value area each day will be valuable in your trading. (Pun intended!)

 

The 80% rule is a simple way to ride the market as it potentially fills the value area. However, there is an exception to be alert for. If the market opens inside the value area and then migrates above or below it, the 80% rule can still come into play. Watch for it to get back into the value area for those important two consecutive brackets or 30-minute bars.

 

Best Trades to you,

 

Larry Levin

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That is a very interesting tip. Obviously it is for sideways markets, because a strongly trending market will not cover the same ground twice.

 

I am going to have to play with this, and see how it works.

 

Right now, I Spear Point trade, which allows me to win 70-80% of the time (Sometimes more if I am focused) on trends. I generally just trade for the day, and am often in, and then out quick.

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Hi Larry, thanks for the great insight!

 

My studies have shown that volume is more fractured than I first thought, in that 70% of the volume may be concentrated in several disparate areas. In this case (I attach the current EURUSD 1 day volume heat-map), how would the rule apply. FYI, I use this to show points of support and resistance, and don't usually display the colors, just the lines at which volume changes by a significant percentage.

 

Further to your post, what action do you recommend if price is within the zone, since there is no directional information at this point (is we treat the zone as an attractor then the play is obvious).

 

Best

 

John

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Hi Larry, thanks for the great insight!

 

My studies have shown that volume is more fractured than I first thought, in that 70% of the volume may be concentrated in several disparate areas. In this case (I attach the current EURUSD 1 day volume heat-map), how would the rule apply. FYI, I use this to show points of support and resistance, and don't usually display the colors, just the lines at which volume changes by a significant percentage.

 

Further to your post, what action do you recommend if price is within the zone, since there is no directional information at this point (is we treat the zone as an attractor then the play is obvious).

 

Best

 

John

 

Hmpft! Will try again with the attachment, problem with the "upload button" not being on the screen :haha:

5aa710ba71f2a_111209-1dayvolumeheatmap.thumb.gif.d93293a041d1d6ad11afedac133658f1.gif

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John, attached is an accurate heat map profile of the euro futures contract. As no volume is available for forex, this is about as accurate a volume picture as you can get for fx. As you can see, your heat map profile is quite a bit inaccurate. The volume is much more heavily concentrated towards the bottom of the profile, which should make sense, as there was very little volume until 8am EST, and then the heaviest period was 9am to 10am. Then it spent some time in the lower range developing value.

 

Also, I'm curious -- you seem to have a daily profile set up from midnight to midnight. Why? A much more logical option is to use 6pm EST as the start of your 24 hour trading day. No market trades from midnight to midnight EST.

12_10.2011-09_10_24.thumb.png.18f1240828c88714125db0ba39c73aa0.png

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Firstly, when the first 'bar' comes around, there may be little edge left in this trade.

Secondly, context is paramount. Suggesting that it works regardless of direction is deeply misleading - as is your reference to floor traders, as they are now extinct - those who are left are only really there to execute blocks. The comment however does suggest how old the original material was (this was originally a set-up from Cisco futures if Im not mistaken).

 

You also suggest a fixed stop of 2 points. This too is silly.

 

The original 80% idea suggested that price will reach the other side of value 80% of the time. You will only get that figure if you apply the rule with common sense and not trade the set up mechanically as you suggest. In other words, it is quite possible the market could make another daily high/low (thus taking the 2 point stop out) before rotating to the other value extreme.

 

People should be very, very cautious of vendors.

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How do you calculate the value area? top 80%, bottom 80%, 40% either side of the median?

 

Not the median, the mode (POC). It's usually 70%.

 

From MoM:

 

"First, identify the price at which the greatest volume occurred. Then, sum the volumes occurring at the two prices directly above the high-volume price and compare it to the total volume of the two prices below the high-volume price. The dual price total with the highest volume becomes part of the value area. This process continues until 70 percent of the volume is reached."

 

Practically speaking though, best to let a piece of software do it for you. Investor R/T does it, NT's gomi indicators will do it, I think MultiCharts does it, and a slew of others. There are alternative ways to calculate the VA and I don't know if the above description from MoM is what's usually used today anyway. Just let the software do the work.

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here's my 2 cents; The 80% value area is actually from the calculation for a 1% standard deviation, which is part of the Market Profile research that dates back to the 1970's. One standard deviation will give you 68% , that is then rounded out to 70, and then here has been rounded out to 80 because instruments like the E mini run up past the 68% much of the time before a retracement.

There is a world of useful and very helpful information on market profile out there, and much of the latest work I've seen has eclipsed the original guys like Steidlmeyer, Dalton et al. There are guys in Europe producing fabulous chart indicators, and customizing them for the idiosyncracies of the various instruments.

The Dude gave I thought, some insightful comments, you can't mechanically trade volume or price weighted averages ( market profile is done in both ) without as the originators said, ( eg Tom Alexander) taking into account the wider view of the market. Today is a terrific example in the Euro. In my experience most of the professional traders use some sort of Volume or price weighted moving average to assess the markets, over the short, long and everywhere in between periods. Picture this: one could create a chart based on the various session periods that each instrument trades in, the European, overnight, US Asian etc and get different results on the deviation.

Hope this helps.

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The 80% rule is so outdated. It belongs on the same page as the moving average cross-over.

 

If trading was this simple do you think Investment Banks would be paying quants >100k pa to come up with codes. Indeed many Banks ask for Phd's from TOP universities.

 

If only they knew the 80% rule!

 

I await the next 'Secret trading tip technique'... what will it be? One time framing... If you see lower highs & lower lows then you're in a downtrend? No Sh*t Sherlock.

 

 

Just for the record, there is no day to day correlation in markets, just cos its up today, don't mean its gonna be up tomorrow. All a Day TPO value area will tell you is what happened yesterday.

 

If Larry's Tips n Tricks worked that well, do you think he'd be giving them away in order to entice hapless trainees?

 

VT

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here's my 2 cents; The 80% value area is actually from the calculation for a 1% standard deviation, which is part of the Market Profile research that dates back to the 1970's. One standard deviation will give you 68% , that is then rounded out to 70, and then here has been rounded out to 80 ........
No it hasn't.

 

80% is the accuracy of backfilling the value area - not the size of the value area (which IS 70%).

 

Please keep this point straight. Re-read the first post if neccessary.

 

As far as whether or not 80% accuracy is correct, I don't know but I am not the one making the claim either.

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here's my 2 cents; The 80% value area is actually from the calculation for a 1% standard deviation, which is part of the Market Profile research that dates back to the 1970's. One standard deviation will give you 68% , that is then rounded out to 70, and then here has been rounded out to 80 because instruments like the E mini run up past the 68% much of the time before a retracement.

 

No one uses 80% for a value area; it's still 70%. Please get your facts straight before you let the world know...

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Anyway Josh... how did you determine 80% accuracy? would be interested to see your method and results... thx

 

I never claimed 80% accuracy; accuracy of what even? I have no idea what you're talking about. Maybe you confused me with the original poster.

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Okay, I just did some statistical analysis.

 

Used the ES, continuous contract, RTH only.

 

Out of the past 1000 trading days, here's the deal:

 

Number of times price opens below the prior value area, and after thirty minutes is either at or above the prior value area low: 53

Out of those, number of times the next 30 minute bar stays above the prior value area low: 23

Out of those, number of times the prior value area high is tagged before the day is over: 20

 

The good news: 20/23 is pretty good. The bad news part 1: the prior VAH was actually taken out during that second 30 minute period on all but 8 days. In other words, if you wait for the first 60 minutes, then on all but 8 days you had no trade. Of those 8 days, 5 hit the upper VA from the prior day.

 

So, in the past 4 years, 5 out of 8 days (62%) have fit the picture shown here where the price opens below prior value, and the first 30 minute bar closes inside, and the second 30 minute bar stays inside the prior value area.

 

For the other scenario, where the open is above prior day's value and the first 30 minutes close inside value, we have 67 days.

 

Of those, there are 30 days in which the second thirty minute bar stays within prior value.

 

Of those, 12 days are such that the second thirty minute period stays completely inside value (in other words, the value area low is not taken out during the second 30 minute period).

 

Of those, 6 days hit the VAL (50%).

So out of the last 4 years, the bottom line is, you have had a very small handful of days in which the scenario described here fits (53 days if we are liberal, 20 if we go by the description here), and of those we have a slightly greater than 50% win rate. In other words, don't hold your breath.

Hope this helps.

 

Larry, if you or anyone wants to dispute this analysis, please do so and I'll be happy to report more details though I really don't want to waste my time doing so. Maybe it would be better if you could post days where this actually worked.

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There has been no backtesting, the 80% figure is just a historical benchmark that gets banded about by people who have read a couple of books (from 15 years ago) on MP then suddenly think they've found the holy grail.

 

And of course vendors, who pretend to be helping newbies but really are just interested in getting there hands on newbies cash.

 

By the way thought I'd post one of MY customers testimonials.

 

" Dear ValueTrader,

Thanks you so much for teaching me your futures secret coin toss system technique trick tip. before I subscribed to your site I was a tramp or hobo as we call them in the US. Now I trade a multi-million dollar hedge fund. Your subscripition costs were cheap, (compared to the price of a car or house) and once I'd signed up you kept 1 to 1 tuition with me via you email news letter that bombarded my inbox. Also loved the trading room...20 half wits on MSM messenger with no more experience than me, all purporting to know the direction of the market, and pretending to be successful traders. Thank you so much again VT, you must be laughing all the way to the bank. A Dolt, Utah. "

 

VT

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Joshdance thx for the analysis - I did get you mixed up with the original. Apologies. I was hoping to flush out the BS which you did for me.

 

It strikes me that people say all sorts of nonsense that cannot be backed up empirically. Especially like x happens y% of the time. I can construct a trading system that makes money 90% of the time with no difficulty. The challenge is that when it looses it looses 9x as much as it wins so overall I have no edge!!! ;o)

 

I've not met a trader (yet) who makes strong claims (50.5% winners would be my cutoff) and is willing to put their trades up for analysis.

 

ValueTrader - great quote - how do I become a client ;)

 

ATB

 

DM

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The thing is, I do think there is some value to statistical analysis having to do with the value area. However, the original criteria is not even clear. I did the best I could given the picture and description, but if one is going to claim 80%, then one needs to be sure the criteria for achieving it are clear.

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Hi Larry,

I looked at the ES charts starting from September 15 till today, and found one day - maybe two - in which these conditions were filled (the market opens above or below the value area, and then gets in the value area for two consecutive half-hour periods).

 

Did I miss anything?

Thanks!

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I've not met a trader (yet) who makes strong claims (50.5% winners would be my cutoff) and is willing to put their trades up for analysis.

 

Hi,

 

I have met a lot of traders (actual profitable traders) who have more than 60% winners.

 

I am maintaining a journal, trading a similar method I get around 60% winners. But lets see, any real traders knows these probabilities .5, .6 or whatever in market are not definite, only estimations.

You can see live calls here: http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced-9.html#post133855

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There has been no backtesting, the 80% figure is just a historical benchmark that gets banded about by people who have read a couple of books (from 15 years ago) on MP then suddenly think they've found the holy grail.

 

And of course vendors, who pretend to be helping newbies but really are just interested in getting there hands on newbies cash.

 

By the way thought I'd post one of MY customers testimonials.

 

" Dear ValueTrader,

Thanks you so much for teaching me your futures secret coin toss system technique trick tip. before I subscribed to your site I was a tramp or hobo as we call them in the US. Now I trade a multi-million dollar hedge fund. Your subscripition costs were cheap, (compared to the price of a car or house) and once I'd signed up you kept 1 to 1 tuition with me via you email news letter that bombarded my inbox. Also loved the trading room...20 half wits on MSM messenger with no more experience than me, all purporting to know the direction of the market, and pretending to be successful traders. Thank you so much again VT, you must be laughing all the way to the bank. A Dolt, Utah. "

 

VT

 

Hey don't call me a half wit and there are 30 of us.

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DoOrDie - I think you've missed my point. It's the expectation that counts not the probability. As I said I can easily create a system that has 90% winners but has no edge. I've yet to see a traders account that opens the scale of their edge (not the method) up to analysis. I notice a tendancy that people like to say they are winning but don't like to be accountable.

 

I only had a brief look at the page you post but it doesn't look like people are posting enough information. It's not possible to analyse "it's going to x", without knowing what action's would be taken if it does something different. So saying it's going to x before it takes out my stop at y (or some other exit measure) is possible to analyse.

 

-- DM

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