How to Use Volume Profile in Trading

What is the Volume Profile indicator?

As you know, every trade on an exchange is made between a seller and a buyer, and has a size (amount of cryptocurrency, number of stocks or Forex lots, etc.) and a price.

The Volume Profile indicator takes all trades conducted in a certain period and collects the following information about them:

• Price levels

• Trading volumes

Then it sums up the trading volumes for each price level and presents the results as a histogram on the price chart.

Let’s look at an example. Below are three volume profiles on a EUR futures price chart. The profiles are displayed in semi-transparent blue.

Volume profiles on a chart

The more volume is traded at a level, the longer the bar on the profile histogram. For example, 259 futures contracts were traded at 1.08790 (marked with a frame).

The level at which the largest number of contacts, namely 5510, were traded that day is highlighted in gray. It’s called Point of Control (POC).

Another important term is Value Area. It’s an area where 90% of trades took place.

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How do you read the Volume Profile indicator?

Volume Profile provides important information about the distribution of intraday trading activity:

• Levels at which trading is more active. In such cases, the profile is wide

• Levels at which buyers or sellers predominate. In such cases, the profile is narrow (thin)

• How trading volume is distributed in the Value Area – evenly or not; in its upper or lower part

For example, the above chart shows three profiles. The highest volume levels on the middle and right-hand profiles are almost identical. It could mean that the consensus of buyers and sellers hardly changed during these two days, which is a sign of a flat market where the price moves within a range.

The next example is a profile in the S&P-500 futures market.

Volume profile on an S&P-500 chart

The P-like shape of the profile indicates that most trades were conducted in its upper part. This uneven distribution suggests that buyers were more active.

If the profile showed a uniform distribution (Gaussian bell curve), it would be a sign of a flat market. But in the above case, there was a rapid upward breakout, as a greater number of buyers clustered near the 5250 level. They absorbed all sellers’ volumes and the price went up quickly.

Volume Profile trading strategy with examples

Volume Profile is often used as a component in complex strategies.

Below, I will show simple usage of the Volume Profile indicator as the only source of information for assessing market situations and making trading decisions.

Example 1. A bounce off a thin profile level

The thin profile indicates an evident superiority of one of the parties. The chart below (EUR futures) shows that when the price went up quickly, almost no trades were made, which means there were very few sellers. This spot is circled. Such levels often serve as support zones.

A bounce off a thin profile level

Next day, the price returned to the thin profile level (shown by an arrow) and bounced off it upward. Using the Volume Profile indicator, traders could buy near the low that day.

Example 2. A bounce off a high volume level

Below is an example from the Bitcoin futures market on Binance.

The red rectangle marks the area where most contracts were traded for 2 days. The market was in a temporary balance.

A bounce off a high volume level

On the third day, the price went up, which was a signal that a bullish trend could form in the market.

On the fourth day, a high volume level was tested (shown by an arrow). That moment could be used by Volume Profile readers to enter long positions in expectation of an uptrend.

The S&P-500 futures chart below gives even more examples of how high volume levels can work as support or resistance.

Bounces off high volume levels

When the price goes back to the level where many trades were conducted, it means that many participants are either reducing or increasing their positions in accordance with their strategies. That’s my explanation. There may be other reasons, but in any case, bounces off Point of Control levels occur too often to be considered accidental.

Is Volume Profile a good indicator?

The use of Volume Profile does not guarantee advantages.

How do you use volume profiles?

I use the Volume Profile indicator featured by ATAS.

This indicator helps determine the levels where corrections end and new balances begin.

For example:

How to determine a correction end level using a volume profile

The arrows show that the price moved upward actively, indicating an imbalance and a lack of sellers. A convex formed near level “A”. Such a level often becomes the end of a downward correctional movement after an upward impulse and marks the beginning of a new balance of supply and demand.

If you have questions regarding this article, contact me on LinkedIn.