Gary asked:

“Hello. Could u advise if the tip and bottom prices of value areas are of more importance than the POC since effectively if we take positions at the previous day POC, we would be subject to whip saws as it rotates ard there?”

The AUDUSD 290-minute chart is a perfect illustration for the answer to this question. Let’s turn to Figure 1.

05-27-2008-poc-mkt-pro.jpg

FIGURE 1 AUDUSD 290-Minutes

In Barros Swing terms, we are waiting for a 5-period line to turn down to complete ‘C’ and confirm a sideways market. But the Market Profile shows a probable bell curve (sideways pattern) where the Value Area is forming . The Boundaries of the Value Area are .9636 to .9582.

Notice the price action at the top and bottom of value. We bounced off .9636 and .9582. Figure 1 was taken this morning Hong Kong time. If you look at a chart at time of writing, you’ll see the market bounced of the two zones about twice during the day. This is the way I’d expect the top and bottom of value to behave.

Now look at the Point Of Control (POC) (the red line), notice how the market trades above and below it. In a congestion market, prices are attracted to a POC like a magnet but the POC itself does not provide support.

On the other hand, where you have a zig-zag or straight line correction, the POC may form support or resistance. In Figure 2, the red line is the POC of an incomplete distribution. Notice that the POC did form support for 5 weeks before the market broke to the 50% retracement of the Initial Price Movement (IPM).

05-27-2008-50.jpg

FIGURE 2 GOLD

So, whether or not the POC will provide support or resistance depends on the type of correction.

Gary also asked: “Essentially i am always in a dilemma if i shd enter prices at top of the HVA or low of LVA in anticaption of a breakout from the previous day value area or enter trades at POC of the previous day”.

In reply:

  1. I said that I would not enter at the POC of the previous day. You now know that this answer assumed a sideways market in progress.
  2. I also said that the first part of the question would depend on context. In determining context, one tool I have given you is the algorithm that gives you the probability that development has completed (http://tradingsuccess.com/blog/end-of-developement-nature-of-trends-alogorithm-364.html).

In Figure 1, development for the Value Area began at ‘C?’. Apply the alogrithm to determine if formation of the Value Area has completed. As long as it is still incomplete, then we can sell off the top and buy off the bottom of Value. But if formation of the Value Area is complete, then I’d trade the breakout.

Hope this helps Gary and the other readers of this blog.

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