Profile and Flow Series: 80% Rule Setup

Alright guys, what's going on? This is Ryan, AKA Kenter and Clark. And in this market profile and order flow roadmap video we're going to be talking about the 80% rule. So the auction market theory 80% rule and the setup. So how you would go about taking advantage of this opportunity. So what is the 80% rule? Simply put, 80% rule is a trading setup built on the premise that if price opens up outside of a previous value area and trades back into this value area for two consecutive periods, two consecutive 30 minute periods or TPO periods, there's an 80% chance it'll rotate down to the previous value area low. Alright, so I wrote it obviously that if it opens outside of a previous value area that it'll rotate back down to the low if it gains acceptance. But that's just a mistake, right? It actually, it doesn't matter what side of the market you're coming in from. If you are, if you opened outside of yesterday's value area and you gain acceptance back into the value area low, if you trade two consecutive 30 minute periods into the value area, then what we're looking at is it trading up to the value area high. So it works both ways. In this example, I just realized that I wrote it as if it only applies from high to low. This is something that was popularized by market profile traders. It's something that Jim Dalton talks about.

He's a very famous market profile trader. He, he is the author of two great books that I actually have on that trading book list that I put on the Blockroots community page. He wrote Markets and Profile and Mind Over Markets. And if you have not picked these up, I suggest that you do so. He popularized this. It's been something that we've talked about before and I think that it's important that we have a roadmap talking about the setup and how we would go about trading it. So a few things to note. One, this is built on the same premise that we talk about in auction market theory. To begin with, the idea is built on the foundation of auction and acceptance. Now if we establish a presence outside of value, if you lose this, whether it's outside of value to the high or to the low, it's considered a failed auction. So normally if we have a. I'll just draw this really quick. If we have this as a balance range, let's say that this is one profile and within this box is the value area. Okay? If we make our way outside of value and we fail to maintain this structure outside and we fall back within value, this would be considered a failed auction. The same can be said with moves to the downside. So if we fail to maintain presence outside of value and we fall back within value, it's considered a failed auction as well to the downside. And the idea is that if we were auctioning down or up and gaining acceptance outside of a value area, you would likely be looking at range extension. So if you had a range established, let's say that this is more than just one period. Value areas gain acceptance through the value area high. What we're looking at is if we gain acceptance, we're looking at extension. So if the market was bracketing for a period of time, you'd likely have some type of extension that would lead to a new value area. So that's the basic idea. This is the idea that we talk about in auction market theory when we're talking about market profile. Okay? So it's built on that same foundation, okay. The idea is that we opened outside of yesterday's value area and we're back within that value area. So it looks like a failed auction and we're likely going to go about ranging the way we were previously. Okay? Now one thing to note is that in crypto, a close outside of the day's value area, that just implies that the next day is going to open outside of value by default. Right? So there's no after hours gap in crypto. So if you close yesterday outside of value, well, then by default we're going to be opening up outside of value. Okay? So it's really important to take this into context, all right? Are we in a bracketing market to begin with? Are we in a balanced rotational setting? Because what you can have is essentially still, you know, this doesn't just get applied even across the board. What happens if, you know, for example, this is the profile for, you know, this day? Let's just draw something like this, okay? Value area is right there. What this looks like, if it's a profile that looks like that, you know, let's say that we close outside of value of the value area. All right? Let's say we opened up down here and we're just going off of this on its own. Well, this could very well be the beginning of a trend, right? And the market just base out up here, might temporarily step back in, but resume the trend. It's not just that you've closed outside of value and the next day you've opened outside of value and you just touch inside of value once and it means you're Going to rotate all the way back down to the low. Obviously it's really important to take this into consideration in the given context. Are we in a balanced rotational setting to begin with? So do we have.

At least one day that looks like a balanced day? If we're looking at a volume profile chart or a TPO chart, okay, where do we sit in relation to greater market structure? What is the market coming off of doing to begin with? Is it the first balance day after a major trending move? Is it the first balance day after a major impulsive move where we're just consolidating before moving up? These are all things you have to take into consideration. So this is really good to apply when the market already is in balance and you're a day into balance, two days into balance, and so forth. We also want to take into consideration what delta is telling us. So what is delta telling us above the previous value area? And in this example I'm constantly referring to above the previous value area. But the same idea is for below. The opposite case would be for below. What's delta telling us about? Are buyers bidding it back up? Are sellers getting aggressive and so forth? So I should have written end or. But what we're talking about in this case is the, the trade that we're talking about when I get to the image, is going to be a trade where we opened outside of value to the upside and we regain acceptance to the downside. So was there a loss of momentum? Are there any signs of absorption? So looking at these charts right here, we have this case that we're talking about where you have one day right here, previous day, value area established, and we opened here for the day, point of control there. And we close outside of value. Right, Close outside of value. And this is crypto. So we are by default in a 24 hour market going to open therefore where we closed for this next session. So these are day profiles. So here's your session. Here's your session. We close outside of value, this being the value area where 70% of the trading took place. And by default we opened outside of value. So what we're looking for, and this is a semi balanced TPO chart, right? We have signs of extension at both ends. Okay, Single prints. Right. Obviously the market's showing rejection on one side more than the other. But we're looking for this particular setup to occur. And in this case, this was actually on April 4th. This is April 5th. And the day that actually preceded this one was a balance day as well. So for the case of Fitting this on the chart in a neat and organized manner, I just went with these two profiles rather than indicating or rather including three. So we're coming off of being semi imbalanced, rather semi imbalanced, not imbalanced. And we're looking at what happens when we regain or come back into contact with this value area high. And the idea is that we trade consecutively two 30 minute periods. So essentially two TPO bars. So what we're looking at right here, our back to back TPO periods within the previous value area. Right now, when you're looking at it unrolled, that still doesn't give you a complete idea. That's why we have to look at things like delta look at volume. Because the one thing that always has the potential of occurring is that for the first time we are being accepted outside of value. So we open outside. So that means that we did a bunch of this, we moved up and down and, and we closed outside of this value area. And we could very well be setting up for an acceptance outside of value that continues to move upward in this case. So we move sideways for a period of time, price regains or rather gains presence outside of value. And we're looking for acceptance outside of value or we're looking for absorption and an auction back down. So in this case we have those two TPOs, those two profile periods, and these are 30 minute periods. So these are 30 minute bars right here. And, and when we regain that presence, two back to back consecutive periods, what we're looking at is right here. This is what we're looking at in the chart. So these two periods right here on the chart, and if you're using the session profiles on TradingView, this is the value area for the previous day from the high to the low. So in this case it's actually right around 6860 if my memory serves me correct. Okay. And we have those two back to back periods. And the idea behind this is that there's an 80% probability that we will trade or rotate in this case. Now after regaining acceptance into the previous day's value area, there's an 80% chance that we rotate back down towards the low and that we continue and resume being in a.

Rotational environment, bracketed environment, ranging environment, whatever you want to call it. Okay. So at this high, what you would want to do is obviously you're not just going to be looking at the market from this point on. Okay. As we make our move up and are at the value area high, and now above, we want to be Paying attention to the behavior that's occurring up here. Because again, we're going to be looking for whether or not price is being accepted up here and it's going to move upward or it's beginning to fail up here. So some of the signs obviously that we need to look for are losses of momentum absorption using for example, cumulative volume delta. Excuse me for saying, like I hate saying that. Paying attention to delta and seeing if sellers are getting aggressive, if buyers are bidding this up, all these things that we want to look for. I'm going to show you those on the next charts. Alright, so when we have the market profile without order flow goes off of just the two bars within this area. So just these two bars is enough to satisfy this. And we're taking in given context that the market was bracketing and was balanced to begin with. So we have that set up off of that alone. Alright. But again, I think that it's always better substantiate this stuff with order flow. And that's how I've always traded and that's obviously what I've been trying to teach you guys. So right off of this alone, you could take this trade, okay, Regain acceptance back into the previous day's value area. We're looking to continue that pattern of rotating, rotating between a balance range of. I think it was around $220 in this case. Now right off of this, you can actually take the trade. Okay, you could take the trade. Two TPO charts, two 30 minute candle bars. And the idea is that we're going to rotate from the high to the low. So the high to the low is your reward in this case. So if you're looking at this trade and weighing it out from a risk to reward standpoint, your high to low is the reward. All right. I would say that the way you define your risk would be to place a stop based on the 30 minute ATR or the current day's high and whichever is closer. Okay? Now why do I say whichever is closer? Now the theory is that upon a failed auction, price shouldn't be spending much time above the value area. Alright? This would further an argument for acceptance above the value, right? So above the value area if we move up outside of a balance range. So let's just draw this out again. I know everyone loves my artwork. Let's say here's our range for a period of time. Here is back to back days profiles within this range. Now if we move outside of this area and we spend a lot of time up here, it further substantiates the case for an acceptance through this level and a continuation, continuation outside of this range to resolve in a new area and consolidate. The more time we spend up here, the worse, the worse for our, in this case, for our thesis that price is going to rotate towards the low. So you definitely don't want to see price spending a lot of time up here. And it wouldn't give price a lot of room to play up here. So for that reason I would use the 30 minute ATR. So in this case, the 30 minute ATR was $67 and the current day's high for this current day's open, which was closer, which was $60 away. What we're looking at is acceptance through this level underneath the value area right here. The high of this day, which is this profile that's just opened, is right here. And your target is these lows. Are these lows in this case of the previous value area. So you have this trade that is essentially. You can't say that in this case. I drew this, it says 2.448. You can't consider that though. We can't just give ourselves that freebie because by the time we take this trade and you're likely going to be entering in this aggressively, meaning at market, if you're able to get in this trade with a limit, that's great. But by the time you get in this trade, you've already moved away under the previous value area. So at this point, you're looking at a trade that's essentially 2 to 1. But this is how scalping works. You don't have in terms of what you can expect with each trade, it's much lower than a trader who might be a swing trader and trading the higher time frames, but you're hopefully going to have a higher hit rate. So if you have a hit rate that's 80%, you'll do fine. With trades that are two to one all day, what we're looking at is acceptance back into the previous value area. And then there's signs that we obviously want to pay attention to. What are some of the signs that we want to pay attention to? Obviously Delta is going to be one of them. So in this case we're looking at. This is the setup right here. These are those two 30 minute bars right here. Okay. So just looking at these in isolation. So what do you see already? So here's the day, previous day. Okay, and what do you see towards the most recent high? Okay, high, high, high. What do you notice in Delta? All right, Delta, there is a substantial Delta divergence. So you already have the sign that there is absorption that took place up here. So there's absorption that took place up at this high. You see that delta went further than price action. Okay. So you have the sign of absorption and that's if anything, if you see that there's absorption and now you're re accepted back into the previous value area. And in this case you have 30 minute bars consecutive probing that area. I'd say that's enough on its own to get aggressive at that point. But you could look at a more broken down chart as well.

Looking at a more broken down chart. This is exactly what happened at the level. Here are the first two periods, those 30 minute periods that we're talking about that we look to satisfy for that 80% rule. The first one, you have a very aggressive selling into the low. You do have a response by the buyers. This is something that we would say, we would want to look for a shift in participation to occur. So aggressively sold into the low. If you were going to say that if I'm going to draw this over here, that this probe. So let's say we broke above a value area and now we're retesting this to move up, you would want to see that it was aggressively sold. Okay. And that's sort of. I'm trying to draw the fat bodied candle. You would want to see that it's aggressively sold and that the following candle right here was also followed by another shift in participation. So the bad sign is when you have a candle that is green. There's not a tremendous amount of buying though. It's not like it's ridiculously fat towards the top. You have this one bar right here, but it's only just over a million contracts. But the really negative signal is that you have a following bar that immediately engulfs the previous bar. And all of this volume gets aggressive towards a low. Now you've just pretty much wiped out the previous bar. Any sign of a shift in participation has completely just been nullified. And you're looking at very aggressive movement towards the low. And you could see right away at the high of this candle there's no buying. Right. Look at this. 32 contracts, 0 contracts, 1,000 contracts, 50,000 contracts. And what you're looking at is very aggressive selling. This is how to use Delta to substantiate a trade setup that is really primarily just built on the idea of being present within an area. This trade was built on the idea of just gaining a presence within the area. And when I say Presence. I mean, just if we're looking at a chart and this is a level that the idea of a TPO trading into that level is just having a bar like this or like this that probed into the level. Obviously these are supposed to be the same width, but you get the my attention, right? This alone, this 30, this 80% rule did not incorporate any type of order flow, any type of order flow analysis. All right, so with order flow, we're able to see that there was absorption at these highs already. So at these highs already up here, there was absorption. You had a delta divergence. So you had equal highs. Pretty much equal highs. We're not considering this major wick, we're considering where there's more confluence. You had equal highs and the delta was doing this. So there's absorption up here. There's very aggressive selling that we showed on that broken down footprint chart into that low. And you have all the signs that you need to place a stop above this high or the ATR which is closer. And targeting these next lows, in this case the lows of the previous day's value area. The exact opposite is for the long trade, obviously. So if we open below a previous, if we open outside of value, so let's say we open down here, you'd be looking for the exact opposite to occur after gaining re acceptance into the value area. So seller's not getting as aggressive. There hopefully would be some type of cumulative volume delta divergence at the lows. The exact opposite case that we painted for this short would be painted for the long. It's a short term trade, but keep in mind, in a rotational market, price can spend a good amount of time moseying around before getting down to the low. This is something that your target is going to be the low that's going to be your first target. Unless you're trying to just get in and out at something like the point of control for the previous day, then you're only really looking at a trade that, you know, this trade from here to here was essentially $147. And at that point you're cutting the trade down in half. Right. So this is still a trade that's 2 to 1. Right. But you still have to let it run its course. All right? You have to let it run it, let it, let it run its course and hopefully stack up enough of these that you really, you really do well. So that's that, guys. Hopefully this was informative. If you have any questions about it, feel free to reach out.