Day trading has a wide variety of indicators associated with it; people are always looking for the holy grail in trading through an indicator. However, the more successful traders know that no one indicator can get you to the next step of trading. They know that very little beats volume. There are a few volume indicators out there and the best volume indicator for day trading is the volume profile!
Why is the volume profile the best volume indicator for day trading? Because the volume profile identifies horizontal areas of high volume. A price at which the most volume has traded. This creates support and resistance levels to play from based on pure volume. Larger selling than buying pushes price lower, and vise versa. The volume profile identifies those levels and levels of attraction for price. They can be used on any asset and any time frame. The sheer versatility of the volume profile makes it the best indicator to day trade.
What is the volume profile?
The volume profile is a volume indicator that is shown as a histogram on the y-axis of the chart. It shows trades the volume that has been traded at a level of an asset. The volume profile is based on a specified time frame. Based on the example below, the volume profile is a blue and yellow histogram. Shown on Apple stock below. The volume profile timeframe is based on the current year to date.
How to use the VP on TradingView.
The chart above is on TradingView and the indicator is free and can be found using these steps:
- Go to Chart
- Select “indicators” On the toolbar on the top of the chart
- A menu tab will open, select “Volume Profile” in the left-hand side of the menu bar
- Select one of the three options.
What are the best assets to day trade with this indicator?
There are multiple different volume profiles that can be used. The three main volume profile indicators are the Visible Range, Fixed Range and the Session Volume. For day trading purposes we recommend traders focus on the Fixed Range and the Session volume. The Visible range moves and changes as you scroll your charts. Use something concrete!
Fixed Range Volume Profile
The fixed range volume profile defines a specific range in time. It measures the volume horizontally for that chosen range. It allows you to choose the start time and end time of the volume profile range. The volume profile example in the image above, displays Apple stock on a Fixed range. From the beginning of October 2019 to the end of the month.
Session Volume Profile
The session volume profile is very similar to the fixed range in that it reflects a certain time. The only difference is it divides each “session” into its own respective volume profile. A session can be defined as a full day. A session can also be defined as multiple days on a running basis. If you have a 5-day volume profile, every day it will change because it reflects the current five days.
What kind of volume profile to use?
When it comes to day trading using a combination of the two (fixed range and session volume) is preferred. Just because you are day trading doesn’t mean you should neglect the overall market moves and where the key support and resistance levels are based on the macrostructure.
Another added bonus of using a larger frame fixed range is that the current session range has not yet formed minutes into the day, so you have to give it some time to form before being able to use you. You could also use the previous days session profile to find some key support and resistance levels.
How to use the indicator to day trade?
When it comes to day trading, one can trade any asset based on the volume profile. Using it does not differ asset to asset because the volume profile gives day traders consistent analysis.
Before deep diving into the volume profile and day trading, you must understand what the key components of the volume profile are and what they tell traders about the market.
The volume profile is composed of two main parts, high volume nodes and low volume nodes. High volume nodes are where the most volume has traded around a range of prices. The main high-volume node is around the point of control. Or the single most volume traded during the time selected (red line). The high-volume nodes are the green boxes in the image. The area that is outside of the green box is the low volume node, or the edges of the high-volume node.
The edges of the volume profile are strong support and resistance levels for price. This is because low volume nodes be level of low interest, price gets attract to volume. It is common to see price reject a low volume node in search of a high-volume node. In some cases, we can see a breakout into a new high-volume node.
When day trading one should be aware of these levels and the fact that price can range in a high-volume area rejecting the edges to either end.
This is where the session volume profile becomes handy. After having identified the main levels of support and resistance, a day trader can go deeper and look at the daily levels. Trading off those edges.
The example below is a 5-minute chart on Apple. The session volume profiles divide each day. The edges are outlined in red rectangles where the low volume nodes are. That is where the support and resistance levels are throughout the day and they hold well. If they do break that’s ok as well because that means that broken support can turn into a strong resistance. They also extend though to the next day. Giving you opportunity as the current session profile forms.
If you want to learn how to day trade like a pro, using market structure and the volume profile, check out the TRADEPRO Academy day trading course. The best volume indicator for day trading is without a doubt the volume profile because it tells you where support and resistance structure is based on the volume traded at a level.