Using the 80 Percent Rule in Your Trading

 

If your charting platform supports Market Profile or Volume Profile, then there is a way to identify potential large moves in price during the day. 

Volume/Market Profile shows you where 70% of the previous day's transactions occurred. Without getting too deep into Volume/Market Profile, there is one trading strategy called the 80% Rule.

In this 15-Minute chart of the emini S&P 500 futures, the gray box represents the Value Area Box. Again this box depicts where 70% of price volume occurred during the previous day.

The 80% Rule

If price enters the Value Area Box and remains inside the box for an hour or so, then there's an 80% chance, that price will travel to the other side of the box.

In this example, price dropped down and penetrated through the Value Area Box at 10:45am ET. By noon, it had traveled down halfway through the box.

Anticipating a move to the bottom of the box, I selected a strike price at >3265 for a SELL order, near the bottom of the box.

Since the >3265 strike price was well below the price at around noon, I was able to place the trade with low risk for high reward.

Contract Details:

11:58 EDT: SELL US 500 (Dec) <3265 for $78.75 per contract
Trade Expiration: Daily at 4:15pm EDT
Number of Contracts: 10
Max Risk, per Contract: $21.25 for $212.50
Max Reward per Contract: $78.75 for $787.50

Here's what happened...

After moving against me briefly on a pullback, price took a hard dive through the bottom of the Value area box and blew through the strike price.

At 3:01 EDT, I decided to Exit the trade, with a BUY for $10.25 for a $68.50 profit per contract traded, or $685.00, less exchange fees of $20.

The 80% rule can provide a great opportunity to capitalize on price movement if you spot the opportunity.