The volume profile is a tool used by traders to identify key support and resistance levels based on trading volume at different prices. Understanding this indicator allows you to spot areas of high buying or selling activity, which is key to anticipating major market movements.
What is Volume Profile?
The volume profile shows the number of trades executed at each price level. Unlike traditional charts that focus on price and time, the volume profile puts the focus on how many assets were traded in a specific price range.
This allows you to clearly see areas where the market has consolidated (high volume) or had little activity (low volume), valuable information for any trading strategy.
Key components:
Point of Control (POC): This is the price level where the highest volume has been traded. In many cases, the price tends to return to this point before continuing a trend. If the price is above the POC, there is an uptrend; below it, there is a downtrend.
Value Area: Represents the price range where approximately 70% of the total volume has been traded. It is a consolidation zone, and prices usually move within this range.
High Volume Nodes (HVN): These are areas where volume is high and represent strong support or resistance points.
Low Volume Nodes (LVN): Volume is low here, suggesting that price can move quickly through these areas without much friction.
Popular Strategies with Volume Profile:
Value Area Rotation Strategy: Prices tend to consolidate within the value area, allowing traders to take advantage of bounces from the edges of this area.
Breakout Strategy: When price breaks out of the value area, it could trigger a strong move towards the next high volume zone.
This indicator is especially useful in markets with high volatility, where prices can move quickly between volume nodes.
How to use Volume Profile in your trading?
How to use the volume profile:
Identify the POC levels and see if the price bounces off or breaks through that zone.
Use LVNs as quick entry or exit points, as these are points where price tends to move quickly. The volume profile helps you identify key entry and exit levels:
High volume zones: These act as consolidation points, where buyers and sellers have balanced out. These levels tend to act as support or resistance in the future.
Low volume zones: These are points where the price could move quickly, which can be ideal for breakout or reversal operations.
Define your risk management based on the Value Area and its limits.
Tools for graphing the volume profile:
Platforms like TradingView offer tools like the "Fixed Range Volume Profile" or "Visible Range", which calculate the volume profile for a selected period.
Combined strategy:
Use the volume profile together with trend indicators such as the MACD, or momentum indicators such as the RSI, to increase the accuracy of entries and exits.
