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Value Trading Basics

Value Trading Basics - Market Profile® Trading | Order Flow | Auction Market Theory | Value Trading

Introduction


At iTradePod we have a mantra –


“Don’t trade price, trade Value”.



by Rodney Lalgie

addendums by Andrew Hall



CME S&P Pit Floor Trader
CME S&P 500 Pit Floor Trader

The 90% of unsuccessful traders will have no idea of this concept but the 10% who are successful will undoubtedly understand precisely what this means. Many unsuccessful traders also fail to fully understand what the markets they trade online actually are! When you trade from the comfort of your home or an office this may not be entirely apparent, but if you were standing in the trading pits this would be immediately clear. We are all engaged and interacting in an open auction market place. Once this is understood, you will then begin to see price only as an advertisement and focus your attention on looking for where value is.


What is value and how do we define it?
Value is a price zone or region that the market accepts as fair for the commodity, index, instrument or item that is being traded. This is the region where two sided trade takes place and buyers and sellers feel most comfortable facilitating trade.


Baker trades bread for cash
A baker trades bread for cash

Price Acceptance
Consider a baker who prepares 100 loaves of bread every day. He offers them at £1.50 per loaf. Every day he sells his entire 100 loaves inventory. Subsequently, the baker senses an opportunity to maximise profit due to the evident demand and, thus, increases his asking price to £1.75 per loaf. Again, the baker’s entire inventory of 100 loaves all sell at the higher asking price. The market has accepted this higher price creating a higher fair value that is being maintained by order flow.


Price Rejection
It is important to note here that it is only because the buyer indeed accepted the baker’s higher asking price by paying the higher asking pricing that an actual transaction occurs. An alternative scenario would have arisen if instead of accepting the baker's asking price of £1.75, the buyer put forward a bid of only £1.70 per loaf in which case a transaction would not occur until either the baker lowered his asking price and/or the buyer raised his bid so that the buyers bid price matched the baker’s asking price. If the baker had to lower his asking price to attract buyers for any transaction to occur then this would have indicated that those higher asking prices would have been viewed as being unfair by the buyers who rejected an attempt by the baker to sell his loaves at a higher value. In other words trade had not been facilitated.


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