Define Value and Define Risk

For traders, risk is one of the hardest things to define after entering a trade. Risk is a change in momentum. If a short position is taken due to negative momentum, that trade should be held until momentum turns positive. Conversely, a long position should work until momentum turns negative.

To define risk, we must first determine a fair value area. A value area is a market profile term that includes approximately 70% of total volume (one-standard deviation) around the mean or high-volume price.

The 30-minute bar chart for gold shows daily value areas. The daily value areas are constructed during regular trading hours which is also the high volume or most liquid time of day. Generally, if a price trades in more than four 30-minute periods during regular trading hours, it is considered part of the value area. Note that the top and bottom of each shaded box has been visited at least 4 times during the trading day.

Once a direction has been established, a value area can be used to define risk.  For example, in the gold chart the top of value is used to determine risk in a falling market. By using this method, a trader may lock in profits each day using a trailing stop or another exit. The trade is exited when an objective is met or the top of value is violated. On the other hand, the soybean meal chart shows how to trail a stop using the bottom of value area in a rising market.

This method of defining risk is useful for day to swing type trades. When momentum or direction becomes clear, value areas can reduce risk and protect profit.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

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