Learn value area high - low concepts

WHAT is a Value Area?

WHY 70%? It comes from statistics. In a roughly bell-shaped distribution, one standard deviation ($\pm 1\sigma$) captures ~68.27% of the data. Market Profile (developed by Peter Steidlmayer at the CBOT) rounded this to a clean 70% to define "where value was accepted." But be careful: this is only a loose analogy. VAH/VAL are not literally ±1σ distances from the mean of the volume distribution — they are the contiguous 70% quantile band grown outward from the mode (POC). On a skewed profile that quantile band and a true ±1σ interval can differ a lot.

HOW to build it from scratch (derivation)

You are handed a volume profile: for each price level $p_i$ you know the volume $v_i$ traded there.

Step 1 — Total & target. $V_{\text{total}} = \sum_i v_i, \qquad V_{\text{target}} = 0.70 \, V_{\text{total}}$ Why this step? We need to know what "70% of volume" actually equals in shares/contracts before we can grow the band to reach it.

Step 2 — Find the POC (the seed). $\text{POC} = \arg\max_i v_i$ Why this step? The Value Area is defined to be centered on the most-accepted price, so we start the band as a single price = POC and expand from there. Starting from the biggest bar guarantees the densest region is included.

Step 3 — Expand outward, greedily. Look at the single immediate level above your current band and the single immediate level below it. Compare just those two adjacent volumes and add whichever side is fuller. Repeat, accumulating volume: $V_{\text{acc}} \leftarrow V_{\text{acc}} + (\text{volume of the fuller adjacent side})$ Why this step? Greedily taking the higher-volume adjacent level keeps the band as dense as possible for each price of width added — the truest picture of "value." (Note: classic Market Profile using TPO counts compares the sum of the two rows just beyond each edge; the modern volume-profile convention compares only the single immediate level on each side — that is the rule we use here.)

Step 4 — Stop. Stop when $V_{\text{acc}} \geq V_{\text{target}}$.

• The highest price included = VAH.
• The lowest price included = VAL.

$\boxed{\;V_{\text{acc}} \ge 0.70\,V_{\text{total}} \;\Rightarrow\; [\,\text{VAL},\,\text{VAH}\,]\;}$

Worked Example 1 — build the VA by hand

Volume profile (price : volume):

$V_{\text{total}} = 5+15+40+25+10+5 = 100$, so $V_{\text{target}} = 70$.

• Start: POC = 103 (vol 40). $V_{\text{acc}}=40$. Why? POC is the seed; 103 has the max volume.
• Compare the single neighbor on each side: above = 104 (15), below = 102 (25). Below is fuller → add 102. $V_{\text{acc}}=40+25=65$. Why? Greedy: grab the denser adjacent level first.
• Band is now [102,103]. Single neighbors: above = 104 (15), below = 101 (10). Above is fuller → add 104. $V_{\text{acc}}=65+15=80 \ge 70$. Stop. Why? We crossed the 70% target the moment we added 104.
• VAL = 102, VAH = 104. (POC = 103.)

So value lived between 102 and 104 today.

Worked Example 2 — trading interpretation

Suppose yesterday's VAH = 104, VAL = 102, POC = 103. Today opens at 101 (below value).

• Price rallies back to 102 (VAL). Why watch this? VAL was the lower edge of accepted value; returning to it is a test of whether buyers reclaim value.
• Price pushes through 103 (POC) on strong volume → high odds it travels to the other edge, VAH = 104. This is the classic "80% rule": if price opens outside value but trades back inside and accepts (≈2 time-periods), there's ~80% chance it fills to the opposite VA edge. Why? Once value is re-accepted, the market tends to rotate across the full value band it agreed on before.

Trade idea: long near VAL (102) with target POC → VAH (103–104), stop below the VAL if acceptance fails.

Common Mistakes

Active Recall

Feynman

Connections

• Point of Control (POC) — the seed price the Value Area grows from.
• Volume Profile — the raw histogram VAH/VAL are computed on.
• Market Profile & TPO — Steidlmayer's original framework using time instead of volume.
• Standard Deviation & Normal Distribution — the 70% ≈ ±1σ statistical analogy (not the literal definition).
• Support and Resistance — VAH/VAL act as dynamic S/R levels.
• 80% Rule (Market Profile) — the rotation trade across the value band.
• Order Flow & Tape Reading — parent chapter: reading where volume clusters live.

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Concept Map

Hinglish (regional understanding)