The volume profile is a useful indicator that can be used to find areas of significant support and resistance, as well as deducing the areas which the price will move through rapidly.
The volume profile has evolved from a widely used indicator used mainly by futures traders, namely the market profile. The market profile was introduced by J. Peter Steidlmayer who wrote Trading with Market Profile in 2003.
What is the Volume Profile?
Traders are used to seeing volume on the x-axis of a trading chart. The volume profile maps out the same trading activity but plots it on the y-axis, showing the trading activity based on price levels.
In short, the volume profile is a histogram that shows the amounts traded at certain price levels.
There are three main components of the volume profile:
- Nodes are the bars on the side of the chart. These nodes show the amounts of an asset bought and sold in a particular price range. The longer the line on the volume profile, the more that was bought and sold (where red indicates selling activity and green indicates buying activity). High volume nodes (HVNs) are areas of high trading activity, while low volume nodes (LVNs) are areas of low trading activity.
- The point of control is shown by a red line and indicates the highest volume bar where most trading occurred. It can act as a significant support or resistance or an important re-test point.
- The value area is the range of prices where a certain percentage of all volume is traded (the standard value is 70%).
When adding the indicator to a TradingView chart, you can choose from fixed range, session volume, and visible range.
- The fixed range displays the volume profile for a fixed time period and is useful for intra-day trading.
- The session volume version is also useful for day trading since it shows the volume profile for each daily trading session.
- The visible range is the easiest to use but is discretionary, as the volume profile is adjusted as you change the number of trading sessions captured by your chart.
How to Use the Volume Profile to Trade
The price is less likely to quickly move through HVNs, and the price is more often going to consolidate. On the other hand, LVNs may see a rapid price movement.
HVNs areas have much more liquidity and a greater number of orders, which is why the price has more trouble breaking through these areas. Since liquidity is much more apparent in HVNs, the price is more attracted to these zones, whereas for LVNs the attraction is much weaker.
LVNs can provide good entries, as they represent areas where price has quickly moved away from that point. HVNs on the other hand, can provide good areas to exit a trade. Since traders have already sold or bought large amounts at these prices, you can get out of your trade and exit your position.
The chart above shows the 4-hour price action for BTC-USD along with the volume profile.
As shown by the long bars on the volume profile, the level around $11,750 acted as a strong resistance and failed to break above this level for too long. Similarly, a strong support level is indicated by the volume profile around $10,100.
After the price broke above this level in August, the level held as it was tested multiple times in mid-August. As the price bounced off support around $10,100, resistance was found near $11,000 which corresponds with the last HVN before the LVN zone between $11,000 and $11,250.
Notice also how the price moved quickly through the LVNs between $11,000 and $11,250. For instance, a single 4-hour candle moved through this entire range as bitcoin went from $11,000 to above $12,000 in early August. After the uptrend became exhausted at the HVN around $11,750, the price headed south and moved through the LVNs between $11,000 and $11,250 in a single bearish candlestick, mirroring the previous price action for those LVNs.
Another example of using volume profiles is shown below. Notice the big cluster of low volume nodes between $10,000 and $8,800. As the price was hovering over $10,000, the volume profile would have alerted us to this area and suggested a breakout to the downside. As the chart shows, there was a big drop in the price of bitcoin and moved through this area in just a couple of trading sessions.
The volume profile indicated support around $8,200 to $8,000 and as the price entered the zone of HVNs, the market entered a period of consolidation. At prices associated with HVNs, it is often interpreted as where the “smart money” trades.
The point of control can be also be useful as it indicates a support/resistance level (or a significant re-test level) and shows where most of the volume was traded. If the volume profile is shaped like a normal distribution (i.e., the 'bell-shaped curve') and the price is ranging, then the best trading strategy to employ would be “return to the mean”. The return to the mean strategy would be to sell when the price is above the point of control (targeting the point of control as a take profit level). While if the price is below the point of control, it could signal to go long.
Another strategy would be to use the fixed range version of the volume profile and take note of the point of control. For instance, if you are day trading, you can overlay the volume profile for a day or two.
The chart below shows the fixed range volume profile for October 24 until October 26. We want to take note of the point of control and the maximum prices in this range for the next trading day. The point of control suggested a resistance at $7,466 while the price ranged between $7,293.55 and $8,044.76.
On October 27th, the price did not move anywhere close to the lower point of the range as the lowest point on October 25th was $7,393. The resistance provided by the point of control from the previous few days was broken, providing an early buy signal.
The market experienced a breakout and with the price above the range and breaking above $8,200, the top of the Value Area. Therefore, since the resistance indicated by the point of control was broken and the range was broken, we should have entered long positions on the break of $7,466 and $8,044.76.
In summary, volume profiles are a sophisticated trading indicator that can be used to identify when the price of an asset is more likely to consolidate or break through an area quickly.
For instance, High Volume Nodes can be used to determine areas of support and resistance while Low Volume Nodes are used to identify breakouts and areas of rapid price movements.
The point of control is a significant support or resistance level and often illustrates where the price will tend towards. The value area shows the price range in which 70% of the volume was traded, but can be adjusted to any percentage you want.
To read more about volume profiles check out this guide which was written for forex markets but can be applied to cryptocurrency. Another article on using the volume profile specifically for cryptocurrency trading can be found here.