Use Value Areas to Protect Profit

Breakouts frequently occur after consecutive value areas severely overlap. Value areas are also used to risk and protect profit during a trend.

Value areas include approximately 70% of the volume around the mean or high-volume price, also known as POC (point of control). In the monthly macrographs below value areas are shown. There is a value area high (VAH) and a value area low (VAL). The POC or fair price is shown as that price that sticks out the furthest to the right of each monthly profile.

For example, when a long position has been taken the goal is to ride that rally for as long as the market continues to trend higher. Using a trailing stop to lock in profits is a common method. Defining where that stop should be is a difficult task. That is where value areas come in.

The DIA chart below displays monthly profiles. During the rise note that there has not been a close below a value area low (VAL). By using VAL as a trailing stop during the rally, the long position would still exist with a huge profit continuing to mount.

The dollar index (DX) chart below shows the same pattern, only in a downtrend. During the decline a trailing stop using the value area high (VAH) would have kept the short position open from April through October.

Trends that extend for months are rare and tough to catch. Value area violations frequently help determine the onset or end of a trend. To lock in profits during bull and bear markets use value area lows and highs to trail stops. This method will help you maximize profits and reduce the stress of managing trades.

John Seguin
Head Futures Coach
Market Taker Mentoring, Inc.

Trader Education