How to trade with volume profile

In a previous article, we introduced key concepts in volume profile and the various trends that emerge throughout a trading session. With today’s advanced charting platforms, virtually any trader can access this type of market analysis to identify where (price) trading activity took place and how much (volume) trading took place at each price level. Here, we take a closer look at the volume profile and explain how it can be used to identify trade entries and exits.

Volume profile review
Many traders are used to viewing volume as a histogram beneath a price chart. This approach shows the amount of volume traded during each price bar, whether it’s a time-based bar (such as one-minute) or an activity-based bar (such as 144-tick or 2000-tick volume). While this is a popular way to analyze volume, knowing where the volume occurs—in terms of price, rather than time—can be more meaningful.

Volume profile, plotted on the vertical axis of the price chart, does just that: It shows how much trading activity has taken place at each price level touched throughout the trading session. Why is this helpful to traders? Volume profile points out the prices that have been favored by the market as well as those that have been ignored, which can give traders clues about where price is likely to go in the near future.

Volume profile updates every time a new trade order in the market is filled, and the point of control, value area, high volume nodes and low volume nodes all change numerous times throughout a given trading session—especially on actively traded instruments—as more volume activity is recorded. As volume profile develops throughout the trading session, new patterns and trading opportunities emerge. 

For instance, at 11 a.m., following the morning push, the point of control may be located at the top of the chart (towards the session high), only to be replaced later in the session with higher trading volume moving the point of control to a price centered on the chart.

For active traders, it is the developing volume profile that is most relevant. The volume profile at the end of the day will show the history of volume, but not the patterns that could pinpoint trading opportunities during an active trading session. It is this constant evolution of the volume profile during a trading session that can help form trading decisions. 

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About the Author

Jean Folger is the co-founder of and system researcher with PowerZone Trading, LLC.