Profile and Flow Series: 76% Rule Update

Alright, so in this video we're going to do a short follow up to the last video in which we covered the 80% rule. And with Bitcoin it's actually a slightly less value. It is a 76% rule. And the rule goes that if you open up outside of value. So let's say for example, that this day right here opens up outside of the previous day's value area. And in a 24 hour market, all that means is that we close outside of value. That there is, in the case of Bitcoin, a 76% chance or historically 76% of the time we have upon gaining acceptance back into that value area. So meaning we have the presence of two or more TPOs, 76% of the time we have moved from the high to the lower to the low to high of that previous value area. So we've covered that previous range. Now this sounds like a perfect trade. You see this trade and you, you know that it has a very high expectancy or high hit rate, right? And that you can expect that it'll occur favorably. But obviously not all instances are created equal. Now for one, not all value areas are going to be really that attractive. So you might have a balanced range or a balanced few days where the value areas are wide and then you might have a value area that's something like this. It's a $60 range, a $50 range. Okay, we're looking at the value area range in this case. So the Valvar and the tpovar. So obviously looking at that, that's not the most attractive trade because we also have to consider it's not just going to be that you gain acceptance through this level and then that's it, you can kind of just brush your hands and walk away from it and it's going to absolutely work out favorably. You're going to be able to put on a position and exit in a comfortable manner. Sometimes this happens immediately. Sometimes price gains acceptance and moves through the range very rapidly. Sometimes it takes throughout the course of the entire day. And there's a lot of choppy behavior. Okay, In a range that's very tight, we'll see choppy behavior to begin with. But there's really no one size fits all with this trade. Rather, there's no hard, fast rule with regards to this trade. So what we try to do is identify the situations that would be more favorable to begin with. Because again, at first glance or upon first hearing about this, you think that it has to be one of these holy grail situations. So context matters. So two things to point out. The ideal situation is when the beginning of the range is forming. So one of the first signs that you have a range forming is when you start to have you go from value migration to value overlap. So the ideal situation is right when the range is forming. Because right when a range is forming, we can expect that with bitcoin it might take anywhere from three to four to five days before ultimately that consolidation resolves itself, even if we're in a trending period. So especially if we're in a trending period, we want to be as near to the beginning of that trend end and the beginning of that consolidation, because at that point, any value area that we establish will likely carry much more weight. It becomes much more likely that as you move sideways over time, especially for favoring one direction over the other, that at one point the final break of value and acceptance outside of is going to lead to an expansion in a new direction, rather an expansion to the upside or to downside. So the ideal situation is early in range formation. So right when you see the first day form, so you start to see, maybe if you start to spot a top to begin with, you could set this trade up. But upon seeing, let's say, two days into the structure, we might have a little bit more of a clear idea, okay. Especially if we've been very balanced and you have not seen any kind of major move to the upside or to the downside. So earlier in the structure, definitely not beyond what would be the norm for any kind of range.

Typical composites or these short term ranges for bitcoin can last anywhere for three to four days. Sometimes higher, sometimes lower. Obviously depends on how fast the trend is moving. But we can see an example right here of a setup that worked. You had the market open up outside of value. In this case, there was $140 range, definitely worth throwing some pennies at. And the day prior, we open up outside of value, the market moves up, moves back down. Does not have two TPOs. The moment we have two TPOs, okay, when we have two back to back TPOs, in this case, the market's not being rejected very quickly because you can see this, tests it two times before looking like it does anything in terms of gaining acceptance. And you could start to say that this argument becomes stronger as this day is transpiring because the, at this point we've left the area. You don't get two, at this point we've left the area. Now you have two visits. When you start to see we're approaching that level. Again, this should be an area that kicks price back. You're just revisiting support over and over again, makes it more likely that you're going to break that support either way. So all the market is doing is being accepted back into that fair value pocket where buyers and sellers were in most agreement. And let's say that in the case, we're looking at this not just from an individual standpoint, but from the last two days, forming a balance. So as you can see, the market gains acceptance back into this level and auctions from, in this case the high to the low. The first area it's likely going to stop is going to be at the point of control of those structures because that is the fair value level. But it's more than likely going to auction the entirety of that range. Now, again, this is not something you could just apply all the time. Moving forward. What we should do is consider how far we are into the range, what kind of behavior that we're coming off of. Okay. So if a market is starting to show directional conviction, it should be considered as potentially a lower probability instance of this setup. So if we consider that this setup, you know, overall has a 76% chance of happening. You know, you have to imagine there's going to be plenty of times when you might get in and be in one of those 24% chance windows, right, where you are on the wrong side of the trade. So what can you do to identify maybe when these periods would be when you would be more prone to taking the wrong trade? Well, is the market showing directional conviction? Okay, so this market is showing directional conviction. Okay, you have a one time framing structure right here. So the market opens down here, closes almost all the way at the high. Very impulsive move. This just came from a ranging period. So after this market explodes upward, falls into balance, and on that third day, that's when we start to have acceptance into the prior. On the fourth day we actually have the trade set up. But upon that setup, the market comes back into low. And if you're looking at this on the higher time frame, what this was doing was giving us the retest for what is a directional move upward. Okay. So we have to give more weight to the fact that in the case of this higher time frame context, if there's anything to happen, it'll be earlier in the structure. Any kind of acceptance towards the high of whatever range forms along this, any point into the future that that happens further down the line, it's much more likely that it's showing us a resistance is not working and, and that buyers are being accepted up here, sellers are not doing a good job of keeping this price down and that it's going to lead to a breakout. Okay, so if the market has been one time framing, if the market has been coming off a strong trend, if after this period the market has been consolidating already for a long duration, and then we have signs that there is strength change. So if we look at this right here, we could see we're going to focus on the fact that we had, in this case, the market opened up outside of value. Here again, an instance of opening up outside of value. And what happened with each one of these is they did gain acceptance. So you could see that the market auctioned into this multiple times into this value area and did not have any kind of move lower. Alright, same thing up here. If we collapse this day, the market gained acceptance into the value area, but did not cover the entire gap or did not cover that entire range. At this point it was becoming more and more clear that the strength was upward because we had a larger structure that came off an impulsive move. We already did have a considerable consolidation over this four day period. And at this point after the retest, the market is doing a strong job of auctioning upward. This is where the market opened, comes into the low, ends up closing almost right where it opened. And then after that we have a rising point of control and the market's starting again to close towards the high. This is after a major retest. This is after a major impulsive move. And it doesn't look like the market is necessarily in balance. If this was a more balanced structure and we had a tighter period of days and we maintained something along this line, rather than having this action at the low and then immediately closing, almost having an entire day's value migration, there would be more of a case. But instead it appears that the market wants to trend. So specifically after this retest, even though we have this 80% setup, the market has already shown us signs that it wants to trend upward because you have this value migration. Okay, so we have value migration two days prior. Remember, you're not going to see this day set up, obviously, because this is opening on outside of here. But now you have the case if you're looking at this day for maybe this being the potential breakout, right? Because at this point you have a sign that the market is showing value migration over the prior two days. So if one of the signs for this day right here was not the fact that this was the retest. Okay. And the fact that if you're looking at this entire composite now, so if we're looking at this day in relation, market opens at the high, closes almost all the way back at the high, and you see that shine of strength within the day. If that's not enough, you just have to consider that it's not always going to be the case that this trade sets up. What makes it more probable for even a setup that has a high probability. Okay. So market one time framed up in this case already formed a tight consolidation and then started to show signs of imbalance. And if you did not, if you took the trade on this and failed after that, it should become very obvious when you have the market continuously showing signs of strength to the upside. You know, you have to imagine that at some point, if this is the range you're taking these 80% setups within, if the range starts to look something like this, this is what happens when a range breaks. Okay. We don't always look to take advantage of acceptance back within the range at this level specifically, you'll see that no longer are we seeing sellers overwhelm buyers. It's becoming very clear that the bid is stacking up here, and it's going to become very unlikely at that point that this is going to gain acceptance back into the underside of the structure. So not all of these setups get treated the same. Okay. You can't just see that price gains acceptance into previous value area, and it means that it's absolutely going to cover the gap. All right? Otherwise, this would be the easiest trading setup to take advantage of. If you did not take into consideration any kind of higher time frame context or any kind of greater directional flows.