This is a study of charts and volume profile indicators that show the volume of an asset traded at particular price levels over a period. Volume Profile takes into consideration historical data and also different previously traded volumes. The regions within the charts where the reversals may occur that interest seasoned players gain such an ‘unfair advantage.
What is Volume Profile Indicator?
It is the volume of trade. That means the total number of units of stocks and shares of a security. It also refers to the number of transactions that have been concluded. It helps analyze and measure the liquidity of a particular security. Only when volumes are high, are securities more active and liquid.
How Does The Indicator Work?
The volume profile can be of any shape based on how the volumes are distributed. Horizontal lines are drawn to form a histogram. The profile is bigger only when, at a given level, the volume trades are greater.
Conventionally, on the right side of the chart, one can find the volume profile net to the price levels. For a particular period, the total volume traded at a particular price helps create what is otherwise known as volume profile bars. Among all the technical analysis tools that traders use, the volume profile indicators are the most important. They can be represented as a histogram calculated by dividing the total buy and the volumes sold at a certain price over a certain period. Understanding the Volume based trading techniques is significant.
Volume Profile Types
Although there are at least three major types of volume profiles used to study trading, there isn’t any major difference in how they function. The major difference between them is the way that they appear on the chart. Another mentionable difference lies in how easily one can access the volume profile over the particular time that one wishes to see.
- VPSV is also known as Volume Profile Session Volume. All the volume profile of a session is displayed on the chart is shown in this type. Every session on the chart has to have a volume profile corresponding with it. The daily consideration of each session is what changes the period of the chart.
- VPFR is also known as Volume Profile Fixed Range. This one is almost the same as the VPVR (explained below) but with a slight difference. When one wishes to study the uptrend or downtrend, the volume traded during a particular price action period, one can find the initial and final point, but only for that particular period.
- VPVR is also called Volume Profile Visible Range. It is the most widely used tool. It is quite basic too. And it is this basic volume profile tool that most traders love to use. On a histogram, it appears next to the price levels. The candles displayed on the screen automatically display the volume traded for a particular price level. As one travels back and forth across the period of the price action, the volume profile visible range also changes.
For using volume profile, there are different software and apps nowadays. Many of these apps and software are pretty user-friendly too.
Volume Profile Shapes
A volume profile histogram can help print various shapes of volume profiles. Thus, traders can deduce many details and much information from them. Principally there are four shapes of profiles:
- I-shaped Profile. It looks like an ‘I.’, Also known as the thin profile, indicating a strong trend. When there is fierce movement in price, there is hardly any time to build up any trading position. In this profile, only minute volume clusters can be formed.
- P-shaped profile. This one looks like a ‘P.’ It indicates an uptrend.
- B-shaped profile. This is the inverse of the P-shaped profile and looks like a ‘B’ instead. One can find this at the end of an uptrend, or more commonly, in a downtrend.
- D-shaped profile. This one looks like a ‘D’ and is the shape found most commonly. It tells us that the market is in balance.
Volume Profile Terminologies and Rules
There are some concepts that any trader in the market must know. So here are some terminologies to keep your knowledge of volume profile updated:
- Value Area (VA). More than a third of entire volume can be located here. This is where the volume profile becomes a little complex. Since most of the total volume had cumulatively occurred at these levels of prices, it is aptly called Value Area.
- Value Area High or VAH. Within the value region, and in the higher section than the rest, the respective highest point is called the Value Area High.
- Value Area Low (VAL). Within the value region, and in the section that is lower than the rest, the lowest point is called the Value Area Low.
- Point of Control (POC). This acts as a critical point for retesting and for support by traders. On the volume profile, this is the highest volume node that can be seen. It is at this price level that a huge volume is transacted.
- Developing Point of Control (Developing POC or DPOC). The change in Point of Control is called Developing Point of control. To view the change of POC over time, one must observe this Developing POC line as it can be compared to previous times to analyze the changes in trend.
- High Volume Node (HVN). Compared to the average, this is a much higher point in the volume profile. After all, the most important part of the given volume profile is the part that can identify the prices at which trading was most during a particular period.
- Low Volume Node (LVN). Compared to the average, this is a much lower point in the volume profile. It is an important part of the respective volume profile to identify the prices at which trading was least during a particular period. HVN and LVN are always inversely proportional – a very crucial point to note.
- Clearance. This is an area where one can find only Low Volume Nodes. There simply cannot be any High-Value Nodes in this region.
- Ranging Price. This is where the price is jumping between HVNs and LVNs. The Value area will be situated at the center.
- Uptrend. This is where the price will be at the VAH, and VA will be beneath the Volume Profile.
- Downtrend. This is where the price will be at the VAL, and VA will be above the Volume Profile.
In Conclusion
Volume profile is popular and still in existence because of its versatility. It can be used in a wide array of analyses.