A volume profile indicator is a technical tool that indicates the amount of volume traded in a specific period at a particular location on the candlestick chart.
This indicator helps identify the volume profile’s primary key levels on the price chart. It shows the institutional activity on the chart. Because when big players trade, the market activity increases, and the volume profile indicator shows this activity on the chart.
This article will learn about volume profile indicators and how to trade with this indicator.
How does the volume profile indicator work?
Before learning about the volume profile indicator, you should know about the origin of volume in forex or stocks.
What is the volume in trading?
In trading, volume is the number of lots, shares, or assets traded during a specific time interval. For example, if two shares are exchanged at a particular stock exchange, the total daily volume will be two shares.
One important thing I want to make clear here is that in forex trading, the volume generated is not the real volume like in the stock exchange. Because forex is a decentralized market, it does not have a specific location to buy or sell or currency.
So, in forex, the volume is tick volume generated based on trading activity at a specific time. In simple words, high-speed market activity means large volume, while low-speed market activity means low volume.
What is volume profile?
Volume profile is the market activity in a specific interval of time with respect to particular price levels on the chart. The advanced study shows the critical price areas on the chart.
The volume profile consists of bars, which usually form on the right side of the chart. Each bar represents the activity of that price level on the chart. It is a histogram chart.
Types of volume profile?
Volume profile histogram has many types based on the profile shape. I have explained four types here:
- P – Shaped Profile is a volume profile histogram related to the alphabet P and shows a bullish trend.
- B – Shaped Profile is a type of volume profile histogram related to alphabet B and shows the bearish trend.
- D – Shaped Profile is a type of volume profile histogram related to the alphabet D and indicates market balance.
- I – Shaped Profile is a type of volume profile histogram related to alphabet I, and it shows the strong trending conditions in the market.
Terms related to volume profile
You should know a few major terms about the volume profile because it is a new concept, and most traders don’t know how to trade with this indicator.
- Profile high: it is the highest price level during a specific interval of time
- Profile low: it is the lowest price level during a specific interval of time
- Value area: it is the area that contains 70% of total traded volume.
- Value area high: it is the highest price level of the value area
- Low value area: it is the lowest price level of the value area
- High volume node: it is the peak volume achieved in a specific interval of time on the chart. It usually indicates the most increased activity of big traders in the market
- Low volume node: It is the lowest volume achieved in a specific interval of time. It usually forms during a price rally or breakout.
How to trade with the Volume profile indicator?
There are many ways you can use this indicator in your trading strategy. Here I will explain the strategy to determine strong support and resistance levels on the chart with the help of the volume profile indicator.
In this method, the volume profile shows a price level that acts as strong support or resistance level. For example, when a big volume bar forms at a certain price level, the zone near this level will serve as a support level. So, when a big bar forms at the support level, there are many chances of a bullish trend reversal.
On the other hand, when a big volume bar forms at the resistance level, the probability of bearish trend reversal increases.
The Bottom line
The volume profile indicator is the best way to identify the activity of big traders and institutions at different price levels. Their activity reveals the footprints of big traders. By using this indicator, we can trade with big institutions.
So, the best way is to backtest this indicator properly and make your trading strategy based on this indicator to become a profitable trader.