In commodity day trading one of the best commodity trading systems used by a commodity trader is the value area. The top and bottom of the previous day's value area provide support and resistance numbers.
For instance, if I were commodity day trading and had been long above the previous day's value area, I would put my sell stop just bellow the top of the value area.
Because if the commodities market got into yesterday's value area, it would cancel out the bullish signal. The market could then get balance.
If I were commodity day trading and had been short just below the previous day's value area when commodity day trading, I would put my buy stop just above the bottom of yesterday's value area.
Because if the commodities market got back into yesterday's value area, it would cancel out the bearish signal. For me the value area is one of the simplest, yet profitable, commodity trading systems out there.
Ok let's see with examples, do not worry if you do not understand, you will...
How to do commodity day trading using the previous day's value area:
Click on the Graphic to enlarge it.
As you can see in the graphic above we have 5 different cases. Let's now begin with case number 1 (click on charts to enlarge).
- Market opens above previous day's value are and STAYS above:
In the first case we have that when the commodities market opens above the previous day's value area and DOES NOT get inside the value area, a strong bullish signal is triggered.
Now If the commodities market does get inside yesterday's value area, you should look to exit your long position since we can have the 80% rule coming into place.
Normally this works best when the commodities market is trending (moving up) for at least 2 days. Take that into account this fact.
In this first example we have the crude oil futures, you can see how the previous day's value area offered support when the commodities market opened above it. We get a bullish signal to enter.
Note that the commodities market had been in a "small" trend for two days prior to the day trading session (the one analyzed, the fourth day in the chart from left to right). Here is another example with the emini s p.
- Market opens above previous day's value area and GETS inside:
Now we get into the second case. Here we have that when the commodities market opens above the previous day's value area and then gets inside the value area, you could then possibly have an 80% rule to the downside. Normally this type of action happens when commodities markets have had at least 2 days of sideways movement.
Click here to see and example of the 80% rule in commodity future online trading.
- Market opens below previous day's value area and GETS inside:
In the third case we have that when the commodities market opens below the previous day's value area and then gets inside the value area, there is a high probability to get the 80% rule.
This is the opposite case of number 2 where the market is opening above value and not below. Works better when we have a sideways or bracketing commodities market for at least 2 days.
OK, my friend. Let's now go and explore case 4 and 5 in commodity day trading.