Trading with the Volume Profile

A fundamental tool in order flow trading
Introduction to the volume profile
Learn to interpret the profile shapes
Soundboard that controls volume.

Soundboard that controls volume.

The volume profile has become a popular and fundamental tool among order flow traders. Volume profile illustrates trading activity over a given time period at specific price levels the vertical way, indicating dominant and less dominant levels.

The volume profile illustrates trading activity over a given time period at specific price levels the vertical way, indicating dominant and less dominant levels. It is subdivided into the value area, which represents the area where 70% of the total volume has been traded, the value area high (VAH) which represents the upper border of the value area and the value area low (VAL) representing the lower border of the value area. Between the VAH and the VAL is the volume point of control (VPOC). In range phases prices above the VAH can be considered as expensive and below the VAL as cheap. The VPOC is the level where most of the volume has been traded and, thus, illustrates the fair market value. The volume profile and their parameters are created in real-time and, consequently, change in the course of a trading day. Areas where a lot of volume has been traded are called high-volume nodes (HVN) or high-volume areas; the counterpart are low-volume nodes (LVN) or low-volume areas.

High volume areas such as the VPOC for example are popular targets to take profits since they illustrate a level of high interest. Also, consolidations take place in such areas respectively are a result of that. In contrast, low volume areas are levels with low interest and act as support and resistance zones. When a market pushes through an LVN, however, probability increases that the price pushes further in the respective direction with an HVN as a potential target.The candlestick chart below shows related volume profile and their terms (extract from 21.08.2019, HG, M15). 

Volume profile candlestick chart

Volume Profile Shapes

The volume profile is formed during the trading day. The emerging patterns are divided into 4 shapes:

• D-shape

• b-shape

• P-shape

• B-shape

The D-shape has the form of a normal distribution and describes a consolidation or sideways range. Sooner or later, the market will break out in one direction.

D-Shape Chart

The b-shape arises when the market falls sharply and then consolidates. A b-shape is often followed by in a correction in the long direction which can be used for short entries.

b-Shape chart

The p-shape arises when the market rises sharply and then consolidates. A p-shape is often followed by a short correction which can be used for long entries.


Volume P Chart 

The B-shape is a sequence of D-shapes and represents a continuation of a trend. Even though a chart has, from a mathematical perspective, only one value area and VPOC. However, in a B-shape both “D-areas” can be considered as separate VAs whereof the one with the actual VPOC is the more dominant one.

B Shape Volume Chart

Learn more about professional order flow trading with the volume profile. You can reach Alexander at support@uctrading.coach.

 

About the Author

Alexander Kiel is an active order flow trader at UC Trading.