S&P 500 IndexEducation
Imaginary levels: fair price aka value
Intro
So called "value" or fair price is like limits in math, can be infinitely approached but never reached. We can model it, anticipate it, imagine it, but it doesn't make it real. In double/dual auctions fair price is an idea.
We can surely say that some prices are too cheap and too expensive, these are real levels that can proved with evidence. The only thing we can surely say about value is that it's somewhere in middle between these 2, everything else ain't better than just making projections or extrapolations. Neither time nor volume profile won't magically calculate you a fair price buy finding mode of the distribution, it's not better (and probably worse) than just taking an average. None can prove a price to be fair for both buyers and sellers.
It cannot even consistently exist due to the nature of double/dual auction. We have bid & asks, not just bids. A simple illustration is GE futures, that can trade at 2 neighboring ticks for ages, in order for a fair price to even appear for a second, bid should move one tick down or ask should move one tick up, so a free space will be created, only at this point a fair price starts to exist. But guess what? You can't make a trade at this price while it's fair, because in in order for a trade to happen there some1 should place a bid or ask at this free space, at this point the fair price disappears.
You're automatically quoting CL futures at 19:00 Chicago time, BBO is 89.56-89.57. An imaginary fair price of 89.565 can't neither exist nor be traded due to tick size of 0.01.
There's a buy action and a sell action, there's no action in the middle. You can place either bid or ask, the're no "in the middle".
We can go for ages logically proving that fair price is always imaginary, but what we know 2 things: it's in the middle between cheap & expensive, and it appears when there's widening of prices.
The same principle applies to all the resolutions due to the fact that recorded trading activity is quasi-fractal (quasi because fractals go infinitely in both directions, it's not our case exactly).
Howto
After an exhaustion/overexertion a wave should stop and produce another wave in the opposite direction, whatever the size. Sometimes due to other factors it does not happen, and an already overextended/exhausted wave continues to go much further. This wave can be called an overridden wave because this kind of event happens due to an exogenous (not in the data analyzed) event. This event "overrides" the exhausted wave and fuels it to continue. In every overridden wave, its middle aka fair price aka value is an imaginary level that can be used.
A wave that started at 337.89 became overextended/exhausted in both price and time when it reached ~450. After hitting 450 it didn't stop but continued and went really far. It has finally stopped in year 2000 and a sell wave emerged. Knowing that we witness an overridden wave, we start to consider value as a temporary legit level. Imaginary, but still a level, ain't no options aye? And again, we use imaginary levels when there's nothing else, but a decision has to be made.
Statistically, overridden waves are the structural breaks. A serious change. Fair price is supposed to become new cheap or new expensive.
So called "value" or fair price is like limits in math, can be infinitely approached but never reached. We can model it, anticipate it, imagine it, but it doesn't make it real. In double/dual auctions fair price is an idea.
We can surely say that some prices are too cheap and too expensive, these are real levels that can proved with evidence. The only thing we can surely say about value is that it's somewhere in middle between these 2, everything else ain't better than just making projections or extrapolations. Neither time nor volume profile won't magically calculate you a fair price buy finding mode of the distribution, it's not better (and probably worse) than just taking an average. None can prove a price to be fair for both buyers and sellers.
It cannot even consistently exist due to the nature of double/dual auction. We have bid & asks, not just bids. A simple illustration is GE futures, that can trade at 2 neighboring ticks for ages, in order for a fair price to even appear for a second, bid should move one tick down or ask should move one tick up, so a free space will be created, only at this point a fair price starts to exist. But guess what? You can't make a trade at this price while it's fair, because in in order for a trade to happen there some1 should place a bid or ask at this free space, at this point the fair price disappears.
You're automatically quoting CL futures at 19:00 Chicago time, BBO is 89.56-89.57. An imaginary fair price of 89.565 can't neither exist nor be traded due to tick size of 0.01.
There's a buy action and a sell action, there's no action in the middle. You can place either bid or ask, the're no "in the middle".
We can go for ages logically proving that fair price is always imaginary, but what we know 2 things: it's in the middle between cheap & expensive, and it appears when there's widening of prices.
The same principle applies to all the resolutions due to the fact that recorded trading activity is quasi-fractal (quasi because fractals go infinitely in both directions, it's not our case exactly).
Howto
After an exhaustion/overexertion a wave should stop and produce another wave in the opposite direction, whatever the size. Sometimes due to other factors it does not happen, and an already overextended/exhausted wave continues to go much further. This wave can be called an overridden wave because this kind of event happens due to an exogenous (not in the data analyzed) event. This event "overrides" the exhausted wave and fuels it to continue. In every overridden wave, its middle aka fair price aka value is an imaginary level that can be used.
A wave that started at 337.89 became overextended/exhausted in both price and time when it reached ~450. After hitting 450 it didn't stop but continued and went really far. It has finally stopped in year 2000 and a sell wave emerged. Knowing that we witness an overridden wave, we start to consider value as a temporary legit level. Imaginary, but still a level, ain't no options aye? And again, we use imaginary levels when there's nothing else, but a decision has to be made.
Statistically, overridden waves are the structural breaks. A serious change. Fair price is supposed to become new cheap or new expensive.
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