Volume Profile is an advanced charting study that displays trading activity over a specified time period at specified price levels. The study (accounting for user defined parameters such as number of rows and time period) plots a histogram on the chart meant to reveal dominant and/or significant price levels based on volume. Essentially, Volume Profile takes the total volume traded at a specific price level during the specified time period and divides the total volume into either buy volume or sell volume and then makes that information easily visible to the trader.
How to Calculate Value Area (VA)
Depending on a time resolution of a chart, data from various resolutions can be used in calculations of Volume Profile. When calculating Fixed Range and Visible Range, we alternately try resolutions from 1, 3, 5, 15, 30, 60, 240, 1D, until the number of bars in the time interval, for which VP is calculated, will be less than 5000. For Session Volume the following dependency on a chart resolution is adopted:
Resolution of bars used for VP calculation
1 - 15
16 - 30
31 - 60
61 - 120
121 - 240
241 and more
The first thing that most traders will use volume profile for is identifying basic support and resistance levels. It is important to note that using Volume Profile as an identifier for support and resistance levels is a reactive method. This means that unlike proactive methods (such as trend lines and moving averages) which are based on current price action and analysis to predict future price movements, reactive methods rely on past price movements and volume behavior. Reactive methods can be useful in applying meaning or significance to price levels where the market has already visited. Basic technical analysis has shown that a support level is a price level which will support a price on its way down and a resistance level is a price level which will resist price on its way up. Therefore, one can conclude that a price level near the bottom of the profile which heavily favors the buy side in terms of volume is a good indication of a support level. The opposite is also true. A price level near the top of the profile which heavily favors sell side volume is a good indication of a resistance level.
High Volume Nodes (HVN) are peaks in volume at or around a price level. HVN can be seen as an indicator of a period of consolidation. Usually there is a great deal of activity on both the buy and sell side and the market stays at that price level for a great deal of time compared to other levels in the profile. This can imply a “fair value area” for the asset. When price approaches a previous HVN (or fair value area) a sustained period of sideways movement is expected. The market is less likely immediately break through that price.
Low Volume Nodes (LVN) are the opposite. They are valleys (or significant drops) in volume at or around a price level. Low Volume Nodes are usually a result of a breakout rally or a breakdown. During a rally or a breakdown, there will typically be an initial burst of volume and then a significant drop off. The drop off can imply an “unfair value area” for the asset. When price approaches a previous LVN (or unfair value area), the market is much more likely to rally through or bounce off of that price level. Because it is seen as an unfair value area, the market will not spend as much time there compared to some other levels in the profile.
Just like with most other tools or studies, Volume Profile has a number of uses. There are many trading strategies out there using Volume Profile as a key component. Below are the basics of one such strategy which is based on comparing the current day’s opening price to the previous day’s Volume Profile.
Volume Profile is an extremely valuable technical analysis tool that is used by traders everywhere. The key to Volume Profile’s continued relevancy is its versatility. It is a charting tool that truly does have a wide array of uses. Unlike many other studies, there is little to no debate about Volume Profile’s usefulness. The data that is provided by Volume Profile is indisputable, leaving it to the trader to find new and creative ways to use it. Even though in its simplest form, it is a great reactive method for discovering traditional support and resistance areas, traders are still coming up with ways to chart the indicator in predicative or proactive ways. Consider the trading strategy example given earlier in the article. Being able to compare a real-time event (the current day’s open) with historical events (the previous day’s volume profile) and make a trading decision based on the relationship is a great example of this.
Sets the period for which the indicator builds volume profile, one profile for each new period. The period multiplier is set in the first field, and the period itself, which can take the values "Bar", "Day", "Week" or "Month", is set in the second field.
Determines how the VPSV indicator will be built when the extended hours display is turned on. If set to "All" (default), the indicator will consider the pre-market, main trading session and post-market as one session. One profile will be built for each trading day and it will include the volume for all transactions, starting from the first pre-market candle and ending with the last post-market candle. This is how the indicator works on extended hours previously. The "Each (pre-market, market, post-market)" option allows you to build a separate volume profile for each part of the trading day session, taking into account only deals made during that period. If the symbol has extended hours with pre-market, main session and post-market, the indicator will build three separate profiles for each trading day. With the dedicated "Pre-market", "Market" and "Post-market" options, the indicator will only build one volume profile per trading day, based on the trades for the specified session period. These settings should be used only on charts with extended hours. If there is no extended hours data on the chart or if the Extended Hours display is turned off, the indicator will not be able to build a volume profile for pre- or post-market. The "Custom" option gives you the opportunity to configure the beginning and end of the period for which the profile will be built. You can also choose a time zone.
If a Custom option is selected in the Sessions section, you can configure the session time period. Use the first two drop-down lists to select the start and end time of the period, and the third one to select the time zone.
Toggles between showing total volume for each row or splitting each row into buys and sells.
Sets the range of price levels in which a specified percentage of all volume was traded during the time period (70% by default).
Number of Rows lets you set a specific number of rows that the indicator will display. The Ticks Per Row setting establishes how many minimum ticks should be in every row.
The number of rows to be calculated and shown.
Extends the POC line until it crosses any bar.
Extends the VAL line until it crosses any bar.
Extends the VAH line until it crosses any bar.
The Extend Right parameter allows one to continue building the profile, including all historical candles and all new emerging candles to the right of the second coordinate.
Toggles the visibility of the indicator.
Toggles the display of the numerical values on the indicator itself (buy/sell or total, depending on the 'Volume' setting in the Inputs).
Alters the width of the rows.
Place rows either left or right.
Determines the color as well as opacity for the Up Volume (Buys).
Determines the color as well as opacity for the Down Volume (Sells).
Determines the color as well as opacity for the Value Area Up.
Determines the color as well as opacity for the Value Area Down.
Toggles the visibility of the Value Area High.
Toggles the visibility of the Value Area Low.
Toggles the visibility of the Point of Control.
Toggles the visibility of the Developing Point of Control, showing you how POC was changing when the market was in session.
Toggles the visibility of the Developing Value Area, showing you how VA was changing when the market was in session.
Determines the background color as well as opacity for the Volume Profile area.