MTF Evolving Weighted Composite Value Area

2023년 6월 22일

🧾 Description:
This indicator calculates evolving value areas across 3 different timeframes/periods and combines them into one composite, multi-timeframe evolving value area - with each of the underlying timeframes' VAs assigned their own weighting/importance in the final calculation. Layered with extra smoothing options, this creates an informative and useful 'rolling value area' effect that can give you a better perspective on the value area across multiple periods at once as it develops - without total calculation resets at the onset of every new period.

Let's start with a simplified primer on value areas and then jump in to the new ideas this indicator introduces.

🤔 What is a value area?
Value areas are a tool used in market profile analysis to determine the range of prices that represents where most trading activity occurred during a specific time period, typically within a single 'bar' of a certain higher timeframe, such as the 4-hour, daily, or weekly. It helps traders understand the levels where the market finds value.

To calculate the value area, we look at the distribution of prices and trading volume. We determine a percentage, usually 70% or 80%, that represents the significant portion of trading volume. Then, we identify the price range that contains this percentage of trading volume, which becomes the value area.

Value areas are useful because they provide insights into market dynamics and potential support and resistance levels. They show where traders have been most active and where they find value, and traders can use this information to make better-informed decisions.

For example, if price is trading within the value area, it suggests that it's within a range where traders see value and are actively participating, which could indicate a balanced market. If the price moves above or below the value area, it may signal a potential shift in market sentiment or a breakout/breakdown from the established range.

By understanding the value area, traders can identify potential areas of supply and demand, determine levels of interest for buyers and sellers, and make decisions based on the market's perception of value.

📑 Limitations of traditional value areas

• Static representation: Value areas are usually represented as static zones calculated after the fact. For example, after a daily period is completed, a typical 1D VA indicator will display the value area for the past period with static horizontal lines. This approach doesn't give you the power to see how the value area evolved, or developed, during the time period, as it is only displayed retroactively. It also doesn't give you the ability to view it as it evolves in real-time. This is why we chose to use an evolving value area representation, specifically borrowed from sourcey's Value Area POC/VAH/VAL script function for calculating evolving VAs.
  
• Rollover resets - no memory of past periods!: The traditional value area is calculated over a static period - it is calculated from the beginning of the period, for example a 1 day period, to the end, and that's the end of it. When the next daily period begins, the calculation resets, and has no memory of the preceding period. This limits the usefulness of the value area visual when viewed near the beginning of a new period before price and volume have been given ample time to define an area.
  
• Hard to absorb all of that information: Value areas aren't generally meant to be a hardline representation of something extremely exact - they're based on a percentage of the area where traders appeared to find value over a certain time period. Most traders use them as a guide for support and resistance levels or finding an expected range. Traders typically overlay multiple VAs - sometimes requiring several instances of the same indicator to be applied - to represent the VA across multiple timeframes such as the 4H, 1D, or 1W. The chart quickly gets cluttered and it's not necessarily easy to understand the relationship between these multiple periods' VAs at a glance.
  

🧪 New concepts introduced in this indicator
With the evolving weighted composite value area we tried to address these limitations, and we think the result can be useful and intuitive for traders who want more dynamic and practical VAs for their everyday technical analysis.

⚖️ 1. A composite, weighted multi-timeframe VA
This indicator's value areas represent a combination or composite of the value areas calculated across multiple timeframes. The VAs calculated across each timeframe are then given a weighting percentage, which determines their contribution to the final 'weighted composite value area'.

Pictured below: a 4H/1D/1W MTF evolving weighted composite VA on the BTCUSDT Perpetual Futures (Binance) 5 minute chart:


Traditionally, when traders wanted to get a view of where the majority of trading activity occurred over the past four hours, day, and week, they would need to apply three value area indicators (or sometimes one if it allows multiple custom timeframes), each set to a different period (4H, 1D, 1W). The chart gets cluttered quickly and the information is hard to absorb in one shot. Addressing this problem was the main impetus for creating this weighted composite process.

〰️ 2. Rolling and smoothed evolving VAs
Because the composite VA is calculated based on multiple period VAs, there is no one single point where the area calculation resets (unless all 3 selected timeframes happen to rollover on the same bar). This creates a 'rolling' effect that gives a sense of the progression of the VA as price transitions through the different underlying time periods, without the traditional 'jump' in calculations between periods.

Pictured below: a 1D/1W/1M MTF evolving weighted composite VA on the NQ futures 1H chart:


To help give even more of a sense of perspective and 'progression' of the VA, there are also smoothing options to even out the 'jumps' at period-rollover points.

✔️ What's it good for?
Smoothed, rolling, and evolving multi-timeframe VAs that give you a better real-time perspective of where traders are finding value across multiple time periods at once.

📎 References
1. sourcey's Value Area POC/VAH/VAL script

by adapting its f_poc(tf) function.

💠 Features:

• A MTF evolving weighted composite value area based on 3 underlying VAs calculated across customizable timeframes
  
• Aesthetic and flexible coloring and color theme styling options
  
• Period-roller labels and options for ease-of-use and legibility
  

⚙️ Settings:

• Calculation Decimal Resolution: This setting essentially determines how 'granular' the value area calculating process is. This value should be set to some multiple of the tick size/smallest decimal of the symbol's price chart. Eg. On BTCUSDT, the tick size/decimal is usually 0.1. So, you might use 0.5. On TSLA, the tick size is 0.01. You might use 0.05 or 0.25. Beware: if the resolution is too small, calculation will take too long and the script may timeout.
  
• Show Me Suggested Resolutions: If enabled, a label will display in the bottom right of the chart with some suggested resolutions for the current chart.
  
• Area Percentage: Set the displayed percentage of the calculated composite value area. Igor method = 70%; Daniel method: 68%.
  
• Use a Color Theme: When this setting is enabled, all manual 'Bullish and Bearish Colors' are overridden. All plots will use the colors from your selected Color Theme - excepting those plots set to use the 'Single Color' coloring method.
  
• Color Theme: When 'Use a Color Theme' is enabled, this setting allows you to select the color theme you wish to use.
  
• Resistance Color: When 'Use a Color Theme' is disabled, this will set the 'resistance color' for the composite VA.
  
• Support Color: When 'Use a Color Theme' is disabled, this will set the 'support color' for the composite VA.
  
• Show Period Rollover Labels: When enabled, a label will show above or below the composite VA marking any underlying period rollovers with the label 'New __' (eg. 'New 4H', 'New 1D', 'New 1W').
  
• Size: Sets the font size of the period rollover labels.
  
• Show Period Rollover Lines: When enabled, a translucent vertical dashed line will be drawn across the composite VA when one of the underlying periods rolls over.
  
• Fill Composite Value Area: When enabled, the composite VA will be filled with a gradient coloring from the support line to the resistance line using their respective colors.
  
• Smooth: When enabled, a smoothing moving average will be applied to the composite value area.
  
• Smoothing Period: Set the lookback period for the smoothing average.
  
• Smoothing Type: Set the calculation type for the smoothing average. Options include: Exponential, Simple, Weighted, Volume-Weighted, and Hull.
  
• Enable: Include/exclude a timeframe's VA in the composite VA calculation.
  
• Timeframe: Set the timeframe for this specific underlying VA.
  
• Weighting %: Set the weighting percentage or 'importance' of this timeframe's value area in calculating the composite VA. Beware! The sum of the weighting percentages across all enabled timeframes must ALWAYS add up to 100 in order for this indicator to work as designed.
  

2023년 6월 22일

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