Firstly, it is relatable to understand the key term volume. Volume is a measurement of trading activity that happens in a certain market in a certain period of time. In a stock market, for example, we measure several shares traded for future and obtain numerous options as well. Similarly, we measure how many contracts have changed hands. For every buyer, there is a seller and vice versa. So volume can be defined as an indicator of market strength. As we look upon the increasing buying volumes in a bull market and uptrend, for example, likewise if volumes are falling on increasing selling volumes, then we gather strengths to the downside. It is an indicator that is used by many professionals. This indicator helps in understanding all aspects of markets and traders. It is a powerful indicator because it shows the volume vertically. This implies that it shows you levels in which volume can get very high or very low.
Defining the term
It is an advanced chart display that represents the trade-related activities for a specific timeframe at a specific price level. For this purpose, a histogram is plotted on a chart that showcases significant price levels. Such price levels are essentially based on volume. Furthermore, the volume profile indicator notes the volume that is been traded at a specific price level during some specific timeframe. It then divides the total volume. The division is made by cell volume. As a result, the acquired information becomes easily noticeable by the trader.
The volume profile can be used in a thousand different ways. There are entire books written on this particular subject.
Main types of Volume Indicator
There are four basic types of volume profiles that we can use. They are mentioned as below,
Session Volume Profile
This shows a separate profile for each trading day and, in case of futures, it can be divided into extended trading hours (6 PM EST- 9:30 AM EST) and regular trading hours (9:30 AM EST -5 PM EST).
The trader will be delineating a starting and ending point of interest to delineate the volume profile.
It can be set to show a profile every day, week, month, etc.
A dynamic volume profile that will be changing based on the bars.
Support and Resistance Level
Traders should assume that volume that spikes at the bottom of the volume profile, are the important support levels. Likewise, the levels toward the top end of the volume profile are resistance zones. The peaks in the volume profile are referred to as high volume nodes. These nodes are volume peaks that occur at or near a price level. These spikes can be viewed as a sign of consolidation when compared to the other levels in the profile.
As compared with the other levels in the volume profile, there is usually a lot of action on both the buyer as well as seller sides. During all of this, the market remains at a particular price level for a long time. This may indicate that the asset has reached what the market may suggest as a Fair Value. When the price gets close to the previous high volume zone, it is sensible to assume that price will stall and lose its overall momentum.
Low Volume Nodes
Price will typically break or rally through a low volume area since the price has not reacted heavily in that area previously. Volumes are not accumulated in these areas as prices were not traded much there.
By value area, it is meant that it’s the approximate range of price levels in which a particular percentage of all the volume is traded for that volume profile range. By default, the industry standards tend to be 70% but many people use 68% as it is more accurate with the distribution deviations. The upper extreme is called the value area and the lower extreme value area is low. These levels are the value of high and low. It will usually give some sort of reaction when it’s retested in the future. When the price comes back into them, they are extremely important to keep in mind.
Basically, in the volume indicator, we are looking from a high volume node to a low volume node. Price usually makes this transition with momentum and this is where it is beneficial for the swing trader. A high volume node represents an area of balance for the market and when price moves out of this balance, swing trading opportunities are available in abundance. Volume profile is a standard indicator. In the current trading scenario, most brokers’ terminals provide this in their technical analysis platform. There is software like Amibroker and Ninja Trader. Volume profile indicator helps you identify phases where you need to stay away from the market and phases where you need to participate in the market.
Significance of Volume Profile Trading
This profile indicator secures an elevated position in trading activities because the higher the stock prices move, the lesser time is required to accumulate more volume at any price level. Therefore, a staggering 70% of the total time is spent by the international financial markets in a trading range. Also, professional traders keep a vivid eye on the volume profile. For traders who are having clarity regarding the volume profile indicator, it works quite well for them in adopting a wise trading strategy.
In conclusion, it is worth mentioning that the volume profile indicator is a very profitable analysis tool. Hundreds and thousands of professional traders utilize this key analysis tool wherever they can. It is also highly relevant as its results are always versatile in their form. Moreover, this charting tool has wide-reaching usage around the world. This volume indicator gives the traders the most accurate data. Many traditional, as well as resistance areas, can be easily discovered using this valuable tool. However, many more proactive tools are still being developed. It will also help contribute to the overall trading business.