[Tradevietstock] Fair Value Channel – Premium/Discount Zones

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The Ultimate Tool for Value Traders
[Tradevietstock] Fair Value Channel – Premium/Discount Zones (Polynomial Regression)

Hello again, it’s Tradevietstock,
This time, we’re introducing a powerful long-term tool for value investors and swing traders — a visual framework that answers one key question:

i. Overview

1. 🧠 Logic Behind the Script
This script creates a Fair Value Channel using polynomial regression to model the upper and lower bounds of a stock's expected price range. The core idea is to estimate "fair value" zones that indicate whether the current price is at a premium (overvalued) or discount (undervalued) relative to its historical range.

The script uses fixed coefficients for third-degree (cubic) polynomial equations to define a top channel and bottom channel, then scales and shifts these curves to match the actual price data. Intermediate levels (25%, 50%, 75%) are calculated using geometric interpolation, offering a graded assessment of price positioning within the channel.

2. The Trading Theory
This indicator is based on the idea that markets move in repeatable cycles of overvaluation and undervaluation. Rather than relying on instinct to judge whether an asset is “cheap” or “expensive,” it uses mathematical modeling — specifically, a fixed third-degree polynomial regression — to identify structured price patterns over time. This regression captures the natural wave-like behavior of prices and defines a fair value channel, with upper and lower bounds representing premium and discount zones.

The lower zone signals undervalued conditions, ideal for accumulating positions, while the upper zone reflects overvalued areas, where it may be time to reduce exposure. These zones are scaled to align with the asset’s real price range, making them practical and adaptive.

Ultimately, the indicator brings logic and discipline to value investing. It helps traders recognize favorable buying opportunities within a cycle — and hold until the next major uptrend, instead of reacting emotionally. The strategy: buy low, hold smart, sell high — driven by data, not guesswork.

ii. How to use

1. Key terms
Lookback_period: Sets the historical period used to calculate the highest and lowest prices. Determines whether the analysis is short-term, mid-term, or long-term.

Timeframe_input: Specifies the timeframe used for polynomial regression calculations. Higher timeframes smooth out noise.

Extrapolation_bars: Defines how many bars into the future the fair value channel should be projected (forecasted). Helps visualize future zones.

Show_forecast: Enables or disables the display of forecasted (future) evaluation zones based on extrapolated regression curves.

🎯 Evaluation Zones Based on Fair Value Range
Each of these zones represents a valuation level relative to a stock's or asset's estimated fair value. These zones help investors make informed decisions based on market psychology and price positioning:

🟩 Zone 1 – Deep Discount (0–20%)
Color: Green
Description:
This is the strongest undervaluation zone, where the market or asset is significantly underpriced. It typically reflects extreme fear and pessimism among investors.
A great opportunity for long-term investors to accumulate high-potential assets at bargain prices.
For example, Tesla (TSLA) stock dropped into the Deep Discount Zone in 2019, offering an exceptional entry point. By 2020, the stock had surged approximately 430%, illustrating how powerful the recovery can be from this zone.

The Deep Discount Zone often appears only during recessionary periods or times of extreme market fear, making it one of the best opportunities to accumulate high-quality stocks.
However, due to the elevated risks and uncertainty in such conditions, it’s crucial to prioritize risk management and approach this zone with a mid- to long-term investment mindset, rather than seeking short-term gains.

🟩 Zone 2 – Undervalued (20–40%)
Color: Lime
Description:
Still considered a strong buying opportunity, this zone offers assets at meaningful discounts. While not as deeply undervalued as Zone 1, it remains attractive for value-seeking investors.
For example, Netflix (NFLX) stock experienced a sharp decline of nearly 80% in 2011, pushing it into the Undervalued Zone. This presented a prime buying opportunity for long-term investors.

After a period of consolidation, NFLX surged over 500% by 2013, demonstrating how deeply discounted zones can signal powerful reversal and growth potential when backed by strong fundamentals.


🟨 Zone 3 – Fair Value (40–60%)
Color: Yellow
Description:
This zone represents the true fair value range. Many high-growth or in-demand assets may only dip this low due to market optimism. Buying in this zone can still be wise—especially for fundamentally strong stocks or tokens—depending on broader conditions and expectations.
For example, Apple stock has historically never fallen below the Fair Value Zone, largely due to the company’s strong core values, resilient business model, and consistent performance. Whether a stock dips further into undervalued zones often depends on its intrinsic fundamentals and long-term growth potential.

Likewise, NVDA stock has only dipped into the Fair Value Zone, but not deeper, due to the company’s strong fundamentals and high growth potential.


🟧 Zone 4 – Overvalued (60–80%)
Color: Orange
Description:
In this range, prices are becoming expensive. This is generally a time to pause further buying and begin looking for potential exit or profit-taking opportunities.
Despite potential continued upside, staying disciplined here is key, as price increases may be driven more by speculation than fundamentals.


🟥 Zone 5 – Extended Premium (80–100%)
Color: Red
Description:
This is the extreme overvaluation zone, often driven by market euphoria, FOMO (Fear of Missing Out), and greed.
Avoid buying in this range. Instead, focus on exiting positions and securing profits. Risk of a reversal is high.


2. How to Use?
This indicator is not designed for short-term trading. Instead, it supports a value investing mindset, applicable across various financial instruments—including stocks, indices, tokens, and CFDs.
Investing based on fair value means focusing on the intrinsic worth of an asset and holding through market cycles—from fear to euphoria.

The goal is to accumulate positions during Deep Discount Zones (often during extreme fear or recession) and hold them patiently until the market reaches the FOMO and Extreme Greed stages.
At that point, those who bought during deep discounts become the true winners, having captured both value and long-term upside.

Trading Tutorial
The strategy is simple: Buy cheap, sell high.

Note:
Discount zones are based on the historical price behavior of each asset.
A strong stock may never drop into the lowest zones, while some tokens/indices/stocks might reach the Deep Discount Zone and still dip further before recovering.

Always analyze the asset’s history—does it usually bounce from the Fair Value Zone, or does it often fall deeper before reversing?

Your strategy should adapt to the specific behavior of the stock, token, or index you're trading.

This indicator works with stocks, crypto, indices, and CFDs.
You can adjust any input settings to match your own strategy and risk tolerance, as long as you understand what you're doing.

semalam

Nota Keluaran

I've updated the channel color settings. It's a small change, but it enhances the display.

16 jam lalu

Nota Keluaran

There’s been a minor update to the calculation. All logic and input values remain unchanged, so there’s nothing to be concerned about.

13 jam lalu

Nota Keluaran

I've improved the display mode.

12 jam lalu

Nota Keluaran

I've updated the display mode.