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.
In this article we are going to talk about:
- What is the volume profile?
- How to use the VP on TradingView?
- What are the best assets to day trade with this indicator?
- What kind of volume profile to use?
- How to use the indicator to day trade?
- Pullback trades and the volume profile
- Breakout trades and the volume profile
- Options Trading & volume profile
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.
The volume profile has a different length and different shares of colouring as you’ll notice in the image below. The first thing that you need to know there is an area of major volume (darker colouring) and an area of low volume (either edge of the whole volume profile). The volume profile naturally has areas that stick out farther than others. This is going to be important as we go through the rest of the article.
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 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 strong resistance. They also extend through to the next day. Giving you the opportunity as the current session profile forms.
Pullback Trading with the Volume Profile
The volume profile can be used to identify trading opportunities in certain trading strategies. The first of which is the pullback strategy. The pullback trade is the most basic trade. Where you will look to follow the trend. Either a bullish trend, high highs and higher lows or a bearish trend, lower lows and lower highs.
The premise of the pullback trade is that a prior broken resistance is going to turn support for the bulls. While a prior broken support is going to turn resistance for the bears. We can combine this information with the volume profile to identify the trade opportunities. Whether it’s on a day trade basis or a swing trade basis. We are going to focus on the day trade aspect of this.
From what we know on the volume profile, “edges” where the large volume meets low volume are key areas of support or resistance. Should price break that area we will get a quick scamper to the next area of large volume. The other alternative is they hold and there is no trade.
The pullback trade breeds on this premise. Wait for that edge to break and look for a move back towards the large volume just broken, which means support turns resistance or resistance turns support.
Here are the criteria are broken down:
- Prior day volume profile, outline the edges
- Should they break the next day, use as support/resistance
- Get trade confirmation through volume or candlesticks.
- Target the next volume profile area (heavy volume)
Let’s look at the example below.
Now you don’t have to wait for the day to close, you can easily do this throughout the day.
In the image above, you have the SPY chart at 5-min. From here we have outlined the key edge that is of importance. From here if we break above I’m expecting a move back into that area to test volume, hold, and continue higher.
This is based on structure and the volume profile. The bullish structure turns the double top that is resistant into support for the next spring higher.
Reviewing our plan from above:
- Prior day volume profile edge is drawn out. A key resistance.
- Should price break above convincingly we expect to see the pullback for our next long. Which is what we get.
- The extended Doji on larger volume forms, we would like to get into a long trade on SPY based on this with a stop under the edge drawn.
- Target the net heavy volume area, this is based on prior days volume.
Breakout Trading and Volume Profile
The breakout trade is a more aggressive momentum trade that we can use while trading with a volume profile. It is very similar to that of the pullback, however, you’re not waiting for the break and retest.
The breakout involves identifying volume profile edges, whether it’s within the day or using the prior day’s volume profile.
Here are the criteria for a breakout trade using volume profile:
- Identify the volume profile edges, intraday or daily.
- Wait for a clean break above with a candle that closes above on heavy volume.
- Target the next large volume profile area.
Let’s take a look at this example. The first is using the whole daily volume profile.
- Using prior days volume profile edge. We get a breakthrough on a strong red candle. We also get the opportunity for an intraday pullback.
- The red candles close underneath the level well and hold.
- The target would be the next large volume that had traded there in the past.
This is the second example, where we use the intraday volume.
In this case, we want to identify a low volume area intraday, even if it is not a part of the “low volume” discolored area. It is still an edge. Where we have a potential break towards the next large volume area and the next edge. We do stall temporarily at the break around the POC or the largest volume area. Eventually making out way to the resistance. The breaking point is the blue candle.
Here are our criteria:
- Intraday edge was met and overcome.
- Large green candles on large volume through the level.
- The target is the next large volume area or edge.
Options & Volume Profile
Everything that I mentioned in this article can be applied to other assets and can be used to trade options. Options have larger leverage than stocks and you can use that to your advantage. It can be a double-edged sword. With that being said. If you can learn risk management this strategy can prove to be fruitful with options.
You can use analysis on the underlying and trade the options on that underlying. If you want to learn more about options check out our options page.
If you want to learn how to day trade like a pro, using the 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.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.