Eighty Percent Rule

A futures trading technique which operates under the assumption that if a market opens outside its value areaA range where approximately 70% of the prior days volume traded. The range is derived from one standard deviation on either side of the mean which is roughly 70%. See: Market Profile (where 70% of the prior session’s volume traded) and then trades into value for two consecutive 30 minute periods, there is an 80% chance that the market will rotate all the way to the other side of value.
For example, lets say the value areaA range where approximately 70% of the prior days volume traded. The range is derived from one standard deviation on either side of the mean which is roughly 70%. See: Market Profile in the /ES is 1275 – 1280 and the market opens on a gap down at 1270. During the course of the morning it trades higher and two 30 minute consecutive periods trade above 1275. There is now an 80% chance that the market will trade to 1280 before the end of the day.
Some important notes:
–Neither 30 minute period has to close inside of value in order for the rule to be satisfied, just needs to trade inside it.
If the first 30 minute period closes inside of value, then the rule is automatically satisfied as that implies that the second one will open inside of value. You need not wait for the second 30 minute period to close.
–The rule works both ways, whether the market is moving down from above the value areaA range where approximately 70% of the prior days volume traded. The range is derived from one standard deviation on either side of the mean which is roughly 70%. See: Market Profile or up from below it.
–If the market opens up inside of value and then trades out of value, the rule applies the same way. If the market can trade back inside value for two consecutive 30 minute periods, then it has an 80% chance of rotating to the other side of value.
–Context is extremely important. Do not trade this rule mechanically and expect to have good results. Always judge the strength of any directional move in terms of market internalsInternals refers to “market internals” and is a blanket term to collectively describe the advance decline, breadth, tick and cumulative tick., overall pattern, tempoProbably one of the most important and yet overlooked concepts in the market. The tempo is simply the ‘speed’ at which the market is moving. This is also referred to as confidence. Slow tempo is typical of range bound days where there is lots of responsive activity. Fast tempo occurs when there is initiating activity, and market is breaking out of a range. This is not to say that the market can’t have fast tempo on days when it is rotational or moving between the extremes of a value area. It certainly can. Effective intraday futures trading involves gauging the tempo and knowing that opportunities are fewer and smaller when the tempo is slow. See S.O.H., and where the current range sits in relation to prior areas of balance.