Traders are constantly looking to find out where big money is trading, attempting to find a low-risk trade entry with high probability.
One tool that gives you an edge in the stock market and futures trading is the volume profile.
In this article, I will explain what the volume profile is, how to trade stocks and how to use it for your trading.
What is a Volume Profile?
Volume profile is a horizontal graph that shows the volume traded at a specific price in a given time period. How is this different from a conventional horizontal volume profile that shows up at the bottom of your chart?
Here is an example of the volume profile versus the more traditional horizontal volume tool:
The value of using this tool is that you can see how many trades took place at each price point for each trading day. Volume on a time frame is irrelevant, as it only tells you the buying or selling intensity within the one candle you are looking at. Traditional horizontal volume is not really helpful for trade entries. I will talk more about this in the volume profile trading section below.
Overall, a volume profile is a vertical breakdown of how many shares or futures contracts traded at each price level during a session. For our style of trading, we have a new profile and start calculating at the beginning of each trading day. Once you master this skill, you can experiment with multiple volume profiles – one day, five day’s and monthly.
For now, let’s jump into an explanation of some very important terms you need to know:
- Value Area (VA) – this is the range of prices during which 70% of the total volume was traded, and it is often colored differently for easier visualization.
- Value Area High (VAH) – the highest price of the 70% total value area
- Value Area Low (VAL) – the lowest price of the 70% total value area
- Point of Control (POC) – this is the single price level where the most amount of volume was traded for the session and represents the area of the biggest open trading positions.
Want to watch a video explanation of the Volume Profile tool on Trading View?
Check out our YouTube video below:
Now that you know what a volume profile is, let’s take a look at how to use this for your trading strategy.
Volume Profile Trading
When the stock or futures market is moving higher, the faster the move; the less time there is to accumulate volume at any price level.
This is why markets spend approximately 70% of their time in a trading range. Breakouts cannot occur until there is enough volume that changes hands to create an imbalance between buyers and sellers.
The idea is to open positions only inside of the value area, or near prior value area lows.
A few things to notice in terms of market structure:
- Stock markets advance until buying is exhausted – which forms a new value area high on the volume profile
- Then stock markets pull back to the prior day value area (VA) to pick up some more demand from buyers below
- Finally, markets push higher once again above the prior period value area highs (VAH)
This same structure on the volume profile is also evident on the downside in bear stocks. In this example, you will see a chart of Tesla over a 5 day period. Notice how the red arrows show how the bear market rally stalled out right into the prior day’s volume profile value area (VA)?
Now that you understand how the market structure moves on the volume profile, it is time to set up a trade idea on a fresh chart.
Below is a 15-minute chart of the S&P500 ETF, the “SPY”. You can see that price has increased significantly today, from the low of around $408.50 up to over 411.50. Most new traders will miss this daily move, and buy the top near the 411 area, hoping it moves up further tomorrow.
A professional trader looks at the volume profile and realizes the stock is far away from the current “value area” (VA). Thus, they will put a limit order down near the $410.50 area, to pick up the long position near the top of the value area high (VAH).
The next day in the first hour, the SPY trades down to a low of $410.21 – near the top of the prior day value area high (VAH).
This is where professional traders will buy, putting a stop below the prior day point of control (POC). On the chart, it is the red line at $409.75. Since the most volume traded there in the prior day, you expect to see open long traders buying more to increase their position size. This is how institutional traders build large positions, buying from the stop losses of new traders who bought the top the day before.
Here is a chart of the following day in SPY, and the profit a professional trader was able to generate by using the volume profile trading strategy.
As you can see, when you are using high-value areas as an entry-level, you are buying with the institutional money and trading against the retail trader – who is constantly getting stopped out and losing money.
This is a great beginning step to use the volume profile for your trading strategy. Now start applying it to your favorite stocks for the next 30 days – and be prepared to see the market from a completely different perspective.
In our live trading room, we use this tool on a daily basis to pick up high probability, and low-risk trade setups. What is the best way to find out how professionals really trade? Join them! Our stocks, options, and futures trading rooms are open daily from 9 AM est.
Where to get the Volume Profile Indicator
To get the volume profile indicator, you will need to pay for a premium account at Trading View. You can do this by clicking here. There is a small monthly fee, but the power of the volume profile is worth every penny.
Another option is to ask your broker or charting platform if they offer the volume profile indicator under your current payment plan.
To trade like a professional, you will need to invest in the same tools they have access to. It is worth considering adding the volume profile tool to your trading tool belt.
I hope you enjoyed today’s article, and I would love to hear from you – how is the volume profile working in your trading strategy?
Join us at TRADEPRO AcademyTM to learn how we take advantage of this strategy each morning during the US market open. There has never been a better time to make the investment in yourself!
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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 AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.