Trading the volume profile

Many traders use technical indicators to analyze past and predict future price movement, and to identify potential trade entry and exit points. Technical indicators are mathematical calculations derived from price or volume activity. A moving average, for example, calculates the average price of a specific instrument over a defined number of time periods. Often traders will compare moving averages from various time frames to determine market momentum.

In addition to (or instead of) technical indicators, traders can view price and volume action that are untouched by mathematical calculations. One method of analyzing this market information is through Volume Profile, an advanced charting study that displays trading activity for each price level over a specified time.

Here, we discuss Volume Profile, explain key concepts and look at the different profile types that emerge throughout a trading session. In a second part, we’ll expand on this introduction to explain how Volume Profile can be used to spot high-probability trading opportunities.


Histogram vs. profile

Most traders are accustomed to viewing volume as a histogram that appears across the x-axis (or bottom) of a price chart (see “Volume histogram,” below). A volume histogram examines volume over the time scale and tells us how much trading activity occurred during each specific period, be it daily, five-minute, 610-tick, or 2,000-volume price bars. This way of interpreting tells us when volume occurred, but offers no clues about where it took place.

A different way to view volume is with a Volume Profile chart study. Volume Profile was first used by futures traders using data that was available only to floor traders at the futures exchanges. With today’s advanced charting platforms, virtually any trader can access this type of market analysis to identify where (price) trading activity took place and how much (volume) trading took place at each price level.

Volume Profile appears as a price chart overlay (meaning it is drawn directly over a price chart), and it displays the total accumulated volume at each price level. Unlike a traditional volume histogram that appears across the time scale, Volume Profile appears along the y-axis, over the price scale of a price chart.

“Volume profile” (below) shows one type of Volume Profile study applied to a 5-minute chart of the E-mini Standard & Poors 500 futures contract (ES). Each horizontal bar in the Volume Profile represents one price level—such as 2005.25 or 2008.75—as we see on this E-mini S&P 500 chart. Each bar indicates how much trading activity has occurred at that particular level and up until that point of the trading session.

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