Volume Profile Indicator in Technical Analysis

10/08/2023
Como usar Indicador Perfil de Volumen
Como usar Indicador Perfil de Volumen

What is and how to use the Volume Profile or Volume Profile?

The Volume Profile , also known as Volume Profile in English, is a technical indicator used in the analysis of financial markets. It focuses on showing the distribution of trading volume over a given period on a price chart. Unlike other indicators that focus solely on price, the Volume Profile considers the importance of volume as an additional dimension in the analysis.

The Volume Profile is graphically represented as horizontal bars (or blocks) along the price scale on the left side of the chart. Each horizontal bar shows the total amount of volume traded at a specific price during the analyzed period. These bars form a distribution that resembles a kind of profile or histogram along the price axis.

The key elements of the Volume Profile are:

  • POC (Point of Control): It is the price at which the greatest amount of volume is traded within the period analyzed. It is the level where the highest concentration of commercial activity is found.
  • VA (Value Area): Represents the price range that contains 70% or 80% of the total volume traded in the period. It is usually delimited by two horizontal lines, one above and one below, indicating the most relevant price range from a volume perspective.

The Volume Profilen provides valuable information to traders and investors by allowing them to identify areas of high liquidity, significant control points, congestion zones, and relevant support and resistance levels. It also helps detect potential changes in price direction and can be used in conjunction with other technical analysis and tools to improve decision-making accuracy. It is widely used in different financial markets such as stocks, futures, forex, and cryptocurrencies.

Importance of the Volume Profile ( Volume Profile)

The Volume Profile offers several significant advantages in financial market analysis, which have contributed to its growing popularity among traders and investors. Some of the main advantages and importance of using the Volume Profile are the following:

  • Market Activity Visualization: The Volume Profile provides a unique graphical representation of trading volume as a function of price. It allows a better understanding of how traders are interacting with the market at different price levels, showing areas of high and low activity.
  • Identification of areas of high liquidity: The Volume Profile helps to identify the areas of greatest liquidity, which can be useful to trade with less slippage and obtain more favorable entry and exit prices.
  • Determining support and resistance levels: The control points and value areas of the Volume Profile can serve as important support and resistance levels. Traders can use these levels to make trading decisions and adjust their strategies according to market structure.
  • Detection of areas of congestion and breakouts: The Volume Profile allows you to identify areas of congestion where the price has spent a significant amount of time, which can anticipate future breakouts and emerging trends.
  • Price Pattern Confirmation: The Volume Profile can be used as a complementary tool to confirm technical patterns, such as triangles, flags or double tops/double bottoms, providing additional insight into the strength or weakness of the observed pattern.
  • Evaluating Trend Strength: By looking at the expansion or contraction of the Volume Profile in a trend, traders can assess the strength of the trend. A well-developed and broad Volume Profile in an uptrend or downtrend is usually an indication of a stronger trend.
  • Intraday Market Analysis: The Volume Profile is especially useful for intraday traders as it provides information on volume activity and distribution at different times of the day.
  • Focus on hard data: By focusing on trading volume, the Volume Profile provides objective information based on hard data, which can help avoid emotional biases in decision making.

In summary, the Volume Profile is a valuable tool for the analysis of financial markets because it allows a better understanding of the dynamics of supply and demand at different price levels. The information provided by this technical indicator can help traders make more informed decisions and improve their performance in the market.


How to read and interpret a Volume Profile graph

Reading and interpreting a Volume Profile chart may seem complex at first, but with practice and an understanding of the key concepts, it becomes easier. Here's how to read and interpret a Volume Profile chart:

  • Horizontal axis (price axis): The horizontal axis represents price levels. Each price has its own horizontal bar on the chart.
  • Vertical Axis (Volume Axis): The vertical axis shows the trading volume. The longer the block is on the volume axis, the greater the volume traded at that price.
  • Point of Control (POC): The Point of Control is the level where the greatest amount of volume was traded in the analyzed period. It is the highest point of the Volume Profile distribution and is usually represented by a vertical line on the chart.
  • Value Area (VA): The Value Area represents the price range that contains a specific percentage of the total volume traded (for example, 70% or 80%). The VA is identified by two horizontal lines on the chart, one above and one below, which delimit the most relevant price range from a volume perspective.
  • Volume Distribution: The distribution of volume along the price axis shows how volume accumulates at different levels. Longer blocks indicate areas of increased activity and relevance to the market.
  • Congestion Zones: Zones where volume accumulates significantly can indicate areas of congestion, which can lead to price resistance or support.
  • Key Levels: The levels where significant spikes are found in the Volume Profile can be considered key levels that traders look at to identify trading opportunities.
  • Relationship to market structure: When interpreting the Volume Profile, it is important to consider how it relates to the overall market structure. For example, if there is a large and well-developed Volume Profile in an uptrend, this may indicate further strength in the trend.
  • Time frame and context: The analysis of the Volume Profile must be carried out in the context of the time frame in which it is being operated and considering other relevant factors, such as economic news, macroeconomic events and technical patterns.

Remember that the interpretation of the Volume Profile requires practice and experience. It is advisable to combine Volume Profile analysis with other technical analysis tools to get a more complete view of the market and make more informed trading decisions.

Identification of congestion areas and potential tipping points

Identifying areas of congestion and potential turning points using the Volume Profile can provide valuable information for traders and investors. Here I explain how to carry out this identification:

  • Congestion Zones: Congestion areas in the Volume Profile are regions where significant volume accumulates, indicating that there has been heavy trading activity at those price levels. These zones can be represented by longer blocks or several bars close to each other along the price axis. Congestion zones often act as consolidation areas, where price tends to move sideways before continuing a new trend.
  • Multiple Points of Control (POC): If you notice that there are several control points close to each other in the Volume Profile, this may indicate a particularly relevant area of ​​congestion. Multiple control points reinforce the importance of that price level and can be potential turning points.
  • Tight Areas of Value (AVs): A tight VA can signal a period of balance between supply and demand, suggesting a potential congestion zone. When the VA is tight, it indicates that the price has spent most of its time in that range, which can result in a temporary stall in the current trend.
  • Symmetric Distribution: If the Volume Profile shows a symmetric distribution around a price level, this could indicate a potential congestion zone. The symmetry in the Volume Profile suggests that both buyers and sellers have significant participation at that level, creating a temporary equilibrium in the market.
  • Volume Profile Breaks: Breaks of congestion zones in the Volume Profile can signal potential inflection points. A breakout with a significant increase in volume can indicate a valid breakout and the start of a new trend.

It is important to note that the Volume Profile should be interpreted in conjunction with other technical tools and analysis to confirm the validity of congestion areas and potential turning points. In addition, it is essential to consider the time frame and market context to obtain a more complete and accurate picture before making trading or investment decisions. The combined analysis of multiple factors is essential to make informed decisions and reduce risk in the financial market.

Use of key levels and control points as support and resistance.

Using the key levels and control points of the Volume Profile as support and resistance can be an effective tool for traders and investors as it provides relevant information on areas of high liquidity and market activity. Here's how to use these levels in that regard:

  • Support and resistance based on Points of Control (POC): The Point of Control (POC) is the level at which the greatest amount of volume has been traded in the analyzed period. Since it represents the price at which most activity has been concentrated, the POC is a crucial level for traders. An equilibrium level is considered where supply and demand have equalized in the recent past. POCs can act as support or resistance levels, as traders can expect the price to bounce or react to that level in the future.
  • Value Areas (VA) as support and resistance levels: The Value Area (VA), which represents the price range that contains a specific percentage of the total traded volume, can also act as a support or resistance level. If the price is inside the VA, it could face resistance when trying to break out of the area. Similarly, when the price falls below the VA, it could find support near the limits of this range due to the increased activity and liquidity present in those areas.
  • Key Volume Profile Levels: In addition to POC and VA, other key Volume Profile levels, such as local volume highs or areas with asymmetric distribution, can also be considered as support and resistance. If the price approaches these key levels, traders can anticipate significant reactions due to the presence of increased trader participation at those levels.
  • Confirmation with other indicators and technical analysis: It is important to note that although the Volume Profile provides valuable information, you should always confirm the relevance of key levels and control points with other indicators and technical analysis. The convergence of different signals and support and resistance levels reinforces the validity of a zone of interest and increases the probability of a significant price reaction.

Remember that support and resistance levels are areas where the price could temporarily stop, reverse, or bounce. However, the market is dynamic and there is always a chance that those levels will be breached. Therefore, it is important to use proper risk management and keep an eye on market developments in real time to make informed decisions.

Volume profile in conjunction with other technical indicators

Using the Volume Profile in conjunction with other technical indicators can provide a more complete picture and improve the accuracy of trading decisions. Here are some ways to combine the Volume Profile with other indicators:

  • Volume Profile and Moving Averages: Moving averages are popular indicators that help smooth out price movements and identify trends. By combining the Volume Profile with moving averages, traders can determine the general direction of the trend using the moving averages and at the same time identify areas of high liquidity and congestion through the Volume Profile to find entry and exit opportunities. in trend.
  • Bollinger Bands and Volume Profile: Bollinger Bands are a technical analysis tool that helps measure volatility and define overbought and oversold levels. By using the Volume Profile in conjunction with Bollinger Bands, traders can identify potential turning points and congestion zones that may coincide with the Bollinger Bands standard deviation bands.
  • Volume Profile and RSI (Relative Strength Index): The RSI is a momentum indicator that measures the speed and change of price movements. Combining the Volume Profile with the RSI can help confirm the strength of a trend spotted on the Volume Profile and identify potential divergences between price and RSI, which could suggest a potential reversal.
  • Volume Profile and MACD (Moving Average Convergence/Divergence): The MACD is another momentum indicator that shows the difference between two moving averages and helps identify changes in trend direction. By combining the Volume Profile with the MACD, traders can use the Volume Profile to confirm or filter signals generated by the MACD and improve decision making.
  • Volume and Fibonacci Profile: The Fibonacci tool is used to identify potential support and resistance levels on the chart. By combining the Volume Profile with Fibonacci levels, traders can get additional confirmation of technically important levels and strengthen their trading decisions.

It is essential to remember that each indicator has its advantages and limitations, and no indicator is foolproof. Therefore, the combination of indicators and multidimensional analysis can provide a more complete view of the market and improve trading decision making. Furthermore, extensive testing and analysis is essential to find the combination that best suits your trading style and goals.

Entry and exit strategies based on the Volume Profile

Entry and exit strategies based on the Volume Profile can be effective in identifying optimal entry and exit points in the market. Below are some common strategies that traders use in combination with Volume Profile:

  • Entry into Higher Volume Areas: Traders can look for areas of high activity and congestion in the Volume Profile, such as the Point of Control (POC) or Area of ​​Value (VA). One approach is to enter long positions (buy) near support (POC or VA below) and short positions (sell) near resistance (POC or VA above). These areas represent high liquidity levels and may indicate potential reversal points or trend continuation.
  • Entry on Volume Profile Breakouts: When price breaks out of a congestion zone or Value Area, traders may consider entering the direction of the breakout in the expectation that a new trend will be established. Breakouts with a significant increase in volume are usually more reliable and can indicate further momentum in the market.
  • Entry into transition zones: Transition zones in the Volume Profile are areas where the volume decreases and the profile narrows. These areas can signal that the market is moving from a consolidation phase to an emerging trend. Traders may look to enter the market when the price leaves the transition zone with an increase in volume.
  • POC or VA Based Exit: For exiting positions, traders may consider closing part or all of the position when the price approaches a Control Point or Value Area. These levels are prone to price reactions, so traders can take profits or protect their positions near these levels.
  • Breakout-Based Exit: Traders may consider closing positions when a contrary breakout occurs or when price reaches a significant support or resistance level that has not been broken. Failed breakouts can indicate that the market is changing direction, and closing the position at that time can help prevent further losses.
  • Trailing Stop with the Volume Profile: A dynamic exit strategy is to use a Trailing Stop that adjusts according to the relevant Volume Profile levels. Traders can move the stop-loss below the POC or VA as the price moves in their desired direction, securing profits and protecting against abrupt changes in trend.

It is important to note that no strategy is foolproof, and the Volume Profile should be used in conjunction with other indicators and technical analysis to confirm signals and increase the probability of success. Furthermore, proper risk management and adjusting strategies based on the market context are essential for a sound approach to trading.

Practical examples of operations with different financial assets.

Below are some practical examples of trading using the Volume Profile in combination with other indicators and technical analysis on different financial assets:

Example 1: Actions

Suppose you are interested in trading shares of a particular company. Using the Volume Profile, you see that there is a well-defined area of ​​congestion with a Point of Control (POC) near the current price. You also notice that the price has been trading within a tight Value Area (VA) for the past few days.

Entry Strategy: You decide to enter long (buy) when price breaks out of the upper limit of the Value Area with a significant increase in volume, indicating a potential bullish breakout. You confirm the signal using a momentum indicator, such as the MACD , which also shows a bullish signal. You set a stop-loss below the POC or the lower limit of the VA to protect your position.

Exit Strategy: As an exit strategy, you decide to use a Trailing Stop that is adjusted below the POC or VA as the price moves in your desired direction. This will allow you to lock in profits as the price rises and protect your profits in the event of a retracement.

Example 2: Futures

Suppose you trade futures in the forex market. Using the Volume Profile, you see that the price has been trading within a tight range with a Point of Control (POC) near the current price. You also notice that there is a transition zone where the volume has decreased, which suggests a possible imminent breakout.

Entry Strategy: You decide to enter long (buy) when price breaks out of the transition zone with a significant increase in volume, signaling a potential bullish breakout. To confirm the signal, you use a trend indicator, such as a moving average, which also shows a bullish signal. You set a stop-loss below the transition zone to limit losses in case the breakout is invalid.

Exit Strategy: As an exit strategy, you decide to take partial profits when the price approaches the Control Point (POC), since this level can act as a potential resistance. You then use a Trailing Stop to protect your remaining profits as the price continues to move in your favor.

Example 3: Cryptocurrencies

Suppose you trade cryptocurrencies like Bitcoin. Using the Volume Profile, you notice that the price has been trading in a well-developed uptrend with Point of Control (POC) and Area of ​​Value (VA) moving higher.

Entry Strategy: You decide to enter long (buy) during a correction in the uptrend when the price approaches the POC or the lower limit of the VA. You set a stop-loss below the VA or a moving average that acts as relevant support to protect your position.

Exit Strategy: As an exit strategy, you decide to take partial profits when the price reaches the upper limit of the VA or when it approaches previous resistance levels on the chart. You then use a Trailing Stop to protect your remaining profits as the price continues to rise.

It is important to note that these examples are for illustrative purposes only and that trading in financial markets carries risks. It is always advisable to carry out a thorough analysis, use proper risk management and adapt your strategies according to market conditions and your financial objectives. Also, keep in mind that the past does not guarantee the future, and no trading approach is foolproof.

Volume profile on different time frames (intraday, swing trading, long-term investment)

The Volume Profile can be used on different time frames, making it a versatile tool for different styles of trading and investing. The following describes how the Volume Profile can be applied in each of these time frames:

  • Intraday: In intraday trading, traders make decisions on the same day and generally do not hold positions overnight. The Volume Profile can be very useful in this time frame to identify areas of high liquidity and short-term opportunities. Intraday traders can use the Volume Profile to identify congestion zones, points of control (POC) and areas of value (VA) to determine key support and resistance levels. They can also look at the expansion or contraction of the Volume Profile during the session to assess the strength of the intraday trend. Analysis of the Volume Profile in combination with other intraday indicators can help traders make quick and informed decisions in the short term.
  • Swing Trading: In swing trading, traders hold positions for several days or weeks to capture larger movements in the market. The Volume Profile can be useful for identifying areas of accumulation and distribution on the chart that can indicate potential turning points and areas of trend reversal. Swing traders can use the Volume Profile to confirm technical patterns, such as reversal patterns and continuation patterns. They can also use the Volume Profile to set stop-loss levels and take profit targets based on the relevant Points of Control (POC) and Value Areas (VA) on the chart.
  • Long-term investing: In long-term investing, investors hold positions for months or even years, with the goal of profiting from long-term price movements and trends. The Volume Profile can provide a useful insight into the market structure and areas of interest over the long term. Long-term investors can use the Volume Profile to identify areas of high historical activity, such as significant Points of Control (POCs) and Value Areas (VAs) that can act as key long-term support and resistance levels. They can also use the Volume Profile to confirm long-term trends and detect significant changes in market dynamics.

In summary, the Volume Profile is a valuable tool that can be adapted to different time frames. In day trading, it can help traders make quick and informed decisions in the short term. In swing trading, you can provide relevant information to identify turning points and emerging trends. In long-term investing, it can provide useful insight to identify key areas of support and resistance and confirm long-term trends. Whichever time frame you choose, it is always essential to complement the Volume Profile analysis with other technical analysis tools and proper risk management to improve your results as a trader or investor.

Tools and platforms for the analysis of the Volume Profile.

There are various tools and platforms that offer Volume Profile analysis for traders and investors. Here are some of the most popular:

  • Market Profile: The Market Profile is a graphical tool that displays the Volume Profile in the form of histograms in an additional window to the main chart. This tool is available on many technical analysis platforms and is especially useful for clearly viewing and analyzing the Volume Profile.
  • Volume Profile Indicator: Many trading and technical analysis platforms offer custom indicators that display the Volume Profile directly on the main chart. These indicators automatically calculate and present the Volume Profile along the price axis.
  • NinjaTrader: NinjaTrader is a popular trading platform that offers advanced tools for Volume Profile analysis. It provides customizable indicators and tools to display the Volume Profile in different time frames.
  • Sierra Chart – Sierra Chart is another well-known trading platform that includes Volume Profile features. Traders can access specialized tools and studies to analyze trading volume and its distribution on the chart.
  • Thinkorswim: Thinkorswim is a TD Ameritrade trading platform that provides advanced research and tools, including Volume Profile analysis. Users can access Volume Profile indicators and features to enhance their technical analysis.
  • MultiCharts: MultiCharts is a trading platform that offers a variety of technical analysis tools, including Volume Profile. Traders can use this tool to analyze trading volume and market activity.
  • ATAS (Advanced Time And Sales): ATAS is an order and time tape analysis platform that provides advanced Volume Profile functions. It is popular with traders looking to analyze order flow and trading volume in detail.

It is important to note that the availability of these tools and platforms may vary depending on the region and the broker used. Also, some platforms may offer more advanced Volume Profile features than others. Before choosing a tool or platform, it is advisable to research and test different options to find the one that best suits your needs and preferences.