Trading is a good way to make a return on your money; however, it can be a risky business for beginners or for anyone who does not have a systematic methodology for buying and selling in the market.
There are different trading strategies for different market conditions or individual goals that involve considerations such as technical indicators, chart patterns, fundamental analysis, holding period, entry, target, stop loss, and so on.
Using trading indicators and chart patterns is part of all trading strategies, be it in forex trading, commodities, futures or share trading. Along with the right platform and risk management tools, a trader could get more information about the rising and falling price trends from these price patterns. Traders have long used price patterns to also analyse current movements and forecast future market movements.
One such chart pattern that technical analysts use to anticipate significant price levels based on volume is known as volume profile.
Volume profile
Volume profile is a charting indicator that displays the volume distribution of shares on a single session or over a specified time period traded at specified price levels. The total volume traded at a specific price level during the specified time period is divided by the total volume of buy volume or sell volume. This information is plotted on a histogram as volume profile.
Displayed as a horizontal histogram on a chart, this chart is used by traders to predict areas of high buying and selling interest at specific price levels. These charts are then used in combination with other forms of technical analysis to predict significant price levels indicating dominant and less dominant levels.
The volume profile is different from the volume indicator. While the volume indicator shows the volume at a given moment the volume profile shows the volume at a given price level.
Volume profiles can be used on any single market ranging from cryptocurrencies to Forex to Futures and stocks.
Volume profiles for sniping exit and entries
Volume profiles are important for a trader as they provide meaningful information that can pinpoint sniping entries and exits in the market. Volume profiles allow traders to better time entries and place stops, both during trend phases as well as sideways phases. The volume indicators are extensively used by both day traders and swing traders.
Types of Volume Profile
The volume profile is the key to find high-value zones in the charts. Given below are three different kinds of volume profile used in trading.
- Volume Profile Visible Range (VPVR) appears next to price levels on histogram and displays the volume traded in the price level automatically from the candles displayed on the screen.
- Volume Profile Fixed Rage (VPFR) is the traded volume in a period of price action.
- Volume Profile Session Volume (VPSV) displays all the volume profile of the session that is appearing on the chart.
The various shapes of volume profile
The volume profile histograms appear in different shapes that can be used to form decisions.
- The D-shaped profile indicates a temporal balance in the market.
- The P-shaped profile is an indication of uptrend.
- The b-shaped profile specifies a downtrend or at the rear of an uptrend.
- The thin profile looks like the alphabet “I” and indicates a strong trend.
Commonly used terms in volume profile
- High Volume Node (HVN) - a point in volume profile where there is a significantly higher volume than average. This shows the most traded prices for particular time periods.
- Low Volume Node (LVN) - a point in volume profile where there is a significantly lower volume than average. There is not much volume transacted.
- Value Area (VA) – takes up about 70 % of the volume in the volume profile.
- Value Area High (VAH) - the highest point in the value area section.
- Value Area Low (VAL) - the lowest point in the value area section.
- Developing Value Area (Developing VA) - a value area that changes over time. Represented by two lines which show both Value Area High and Value Area Low over time.
- Point of Control (POC) - the highest volume node on the volume profile.
- Developing Point of Control (Developing POC) - a change of POC over time.
- Clearance - an area in the volume profile in which only LVNs are located, and there are no HVNs on that area.
Finding an entry point using volume profile
If the value area is located at the bottom of the volume profile, the price is trending upward. Once an uptrend has been recognized set an entry point for the trade at the level at the new breakout point of the price.
Finding an exit point using volume profile
If the value area is located at the top of the volume profile, the price is trending downward. Set a stop-loss limit just below the last low of the chart. If the price breaks down below that level, set an exit point and exit the trade.
For any trader planning to make a move in the market, volume profile is a concept that he has to understood and executed well. While volume may not be a precise tool, entry and exit signals can be identified by looking at a volume indicator.
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