Volume Profile Explained - The Most Powerful Trading Indicator
The volume profile is a tool that allows traders to see the volume on a horizontal level at each price. You can visualize at some price levels there is a lot of volume and at some very little to none.The importance of this tool lies in the fact that volume attracts price. Meaning large areas of volume become favorable price magnets.
Formation of the Volume Profile
Unlike standard volume indicators that only show volumes at time, the Volume Profile can provide much more important information, which is volume at a specific price levels.
The advantage of being able to see Volume at each price is very valuable. It tells us which price levels were most important to the "big" market participants who dominate and initiate
The Components of a Volume Profile
High Volume Node (HVN):
An HVN represents a price range with a heavy amount of trading activity compared to the average volume. This level is considered an area of significant price congestion and is often used as a critical support level when the price is below it or as a resistance level when the price is above it.
Low Volume Node (LVN):
An LVN indicates a narrow price range with low trading activity and volume. It serves as a key support level when the price is above it or a resistance level when the price is below, denoting minimal price congestion.
Point Of Control (POC):
The point of control is the price level at which the highest volume was traded within the selected time period. It is the peak of the volume profile histogram and is often considered a point of interest for traders. The POC can act as a magnet for price action and is generally a level traders use to book profits.
Value Area
The Value Area is a concept that comes from statistics and is centered around the Gauss model, widely known as the normal distribution. We are using 68% on the volume profile and on Market profiles 70%
Value Area High(VAH):
The VAH represents the upper edge of the value area. This point is often seen as a support/resistance level by traders.
Value Area Low(VAL):
The VAL refers to the lowest price level within the value area. This point can act as a support or resistance level on a trading chart.
Interpreting Volume Profile
In the chart bellow we can see how we put some of these concepts together to understand market activity and know where to initiate trade.
This is a $NQ chart with split-session volume profiles for Asia/Eu/Us.
We can see how the US session profile played a major role on the following overnight session with price acceptance/rejection between the key areas of the Volume profile until the next US open.
Volume profile is not a strategy by itself, its simply a tool we are using that is playing a support role in our trading and market understanding.
