Using Value Area to Trade S&P 500 EMini
The S&P 500 eMini is popular among the four eMini Futures to trade. Traders grow to appreciate the S&P 500 eMini because its trading action offers a ‘middle ground’ when compared to its stalwart brethren, Dow-30, the nascent leader, Nasdaq-100, and the hypertensive brother, Russell 2000.
Trading the S&P 500 eMini (ES) requires an understanding of Market dynamics and a sense of where the Price is heading. Keenly monitoring price action to the ES’s daily Value Area gives the trader insight into Intra-day Price Direction.
Value Area is defined as the instrument’s Price Range where 70% of yesterday’s quantity was traded. The Value Area is important because it defines the current ‘Comfort Zone’ where traders are comfortable trading under a neutral bias.
By taking price movement into consideration with the Value Area, it can signal Intra-day Price Direction. The Value Area for the ES is particularly accurate in signaling Price Direction because the ES is the eMini trading instrument of ‘middle ground’.
Signals in Intra-day Price Direction are very helpful to traders in deciding quickly which trades to take during the day. A discussion of Value Area signals follows.
80% Rule Signal. The 80% Rule is simple to understand, and quite reliable in calculating market direction. When the market is above or below the Value Area, and then pierces into the Value Area for two consecutive half-hour periods, the market has an 80% chance of at the minimum filling the Value Area.
The trader has an opportunity to place a trade once the signal is triggered and ride the price by the Value Area before deciding to exit the trade.
Above Value Area Signal. When the market opens and stays above the value area, this signals a very strong bull trend. Institutional buying is going on in the market pushing the market higher. A trader may be able to buy into the market on dips, sometimes as the Value Area Top is being tested, before it resumes its rally.
Below Value Area Signal. When the market opens and stays below the Value Area, this signals a very strong bear trend. Institutional selling is going on in the market pushing the market lower. You may be able to sell into the market rallies, such as in a testing of the Value Area Bottom, but you don’t want to trade long when the institutions are selling.
sustain/Resistance Signals. The bottom and top of the Value Area are excellent sustain and resistance levels. for example, if you were long above the Value Area, you would put a sell stop just below the top of the Value Area because if the market pierces into the Value Area, a strong bear trend is signaled. If you want to buy and the market is below the Value Area, you would put your buy order just above the Value Area bottom, because if the market pierces into the Value Area, a strong bull trend is signaled.
In addition, observing the other eMini’s as the ES approaches its Value Area top or bottom can be very helpful in guiding a trader’s decision. For example, when the ES is within its Value Area but hovering just below its Value Area top, if the Nasdaq’s eMini is demonstrating strength, then there is a stronger likelihood the ES will penetrate its Value Area top signaling a bullish bias and a Buy. If the Nasdaq is demonstrating weakness, then there is a stronger likelihood the ES will decline from its Value Area top signaling a bearish bias and a Sell.
In conclusion, considering S&P 500 eMini’s movement with relation to its Value Area is an excellent method of deciphering market direction. The more a trader monitors the eMini’s Price Action to its Value Area, the better ‘in-tune’ the trader will be to its dynamics.