Volume Profile: a translation tool from price action to traded volume levels

A few points on using Volume Profile:

• Provides details on market structure: Reveals where trading activity truly occurred by plotting volume at each price level — offering a clear picture of supply and demand zones, not just price movement.
• Helps to identify levels of interest: Highlights high-volume areas (support/resistance) and low-volume gaps (potential breakout zones), giving traders entry and exit levels grounded in real market participation.
• Unbiased and direct tool: Unlike lagging indicators like the RSI or MACD, Volume Profile collects data as every transaction occurs, making it a coincident indicator. Not market directional, it provides unbiased data to trade with.

Created and popularized in the mid-1980s through the work of traders like J. Peter Steidlmayer and the development of Market Profile, Volume Profile (also known as Volume at Price) is an advanced charting tool designed to display trading volume distributed across different price levels over a specified time period.

Offered as an alternative to traditional volume indicators that show volume over time, Volume Profile is unique in how it organizes volume data, displaying it horizontally across the price axis rather than vertically along the time axis.

When used effectively, traders can utilize Volume Profile to identify key areas where market participants have demonstrated strong interest, revealing potential support and resistance zones that may influence future price movements.

Volume Profile displays volume as a histogram on the vertical price axis, with longer bars indicating price levels where more trading activity occurred, providing immediate visual insight into market structure.

Don’t forget that financial markets are, above all, real markets — where prices are shaped by supply and demand to facilitate transactions

Taking the example of a watermelon: If most of the time watermelons are sold at $5, most of the volume will have been made at that price. Hence, if prices start to deviate from the regular price, volatility tends to accelerate (with buyers and sellers of watermelon trying to see at which price more transactions can be made).

If the price stabilizes at $5.50 after temporarily rising to $6.50 and then falling to $4, volume (or transactions) can begin to build again.

Buyers and sellers of watermelon (or traders in financial markets) will then establish $5.50 as an “equilibrium” price, where participants can interact with more confidence.

The two other high ($6.5) and low ($4) prices will then be marked as “low volume” prices, indicating that buyers and sellers did not agree to transact at these prices for long.

This provides a certain “value” price for watermelons.

In financial markets, value moves dynamically depending on macroeconomic factors, which in turn influence the supply and demand of an asset. When high volumes are built at one particular price, it tends to magnetize diverging prices where more participants will agree to trade.

Volume Profile is a distinctive way of analyzing market activity, with clear differences from traditional volume indicators.

It takes all trading volume that occurred within a specified period and organizes it by price level rather than by time. Each price level shows the total volume traded at that specific price, regardless of when those trades occurred during the analysis period.

When examining Volume Profile, several important elements emerge:

• Point of Control (POC)
• Value Area
• High Volume Nodes (HVN)
• Low Volume Nodes (LVN)

Let’s explore how each of them provides information for analysis.

The Point of Control (POC) is the price level with the highest traded volume during the period. This represents the "fair value" where most market participants agreed to trade, and often acts as a magnet for price.

The Value Area is the price range where approximately 70% of the period's volume occurred. This is usually considered a zone that represents where institutional traders, hedgers, big volume players and market makers consider prices to be “fair”.

Hence, at a “fair” price, more traders make transactions which translates to more volume.

High Volume Nodes (HVNs) are price levels where a large number of trades have occurred, indicating strong buying and selling interest, and may act as significant support or resistance zones.

Low Volume Nodes (LVN) are price levels on a trading chart with very little trading activity, appearing as dips in a volume profile. They are formed during rapid price moves like breakouts or breakdowns.

The low volumes indicate that traders are not interested in that price range, which leads to faster price movements where more traders will want to interact.

They can also be called “air pockets”.

Volume Profile has many potential uses. Here are a few examples:

• Entry indicator: When price approaches high volume nodes or the Point of Control from previous sessions, these levels can provide support or resistance, creating potential entry opportunities on bounces or breakouts.
• Exit indicator: While managing an open trade, reaching a low volume node could suggest price may accelerate through that area, while approaching a high volume node might indicate potential exhaustion, helping to inform exit decisions.
• Confirmation indicator: When looking to open a position, Volume Profile can confirm whether price is trading above or below the value area, helping identify whether the market is in bullish or bearish territory relative to where most participants have established positions.

By default, the Volume Profile is intended to provide a clear visual representation of market structure. Here are a few things to keep an eye on:

Point of Control positioning: When price trades near the POC, it's often in a consolidation or balance phase. Moving away from the POC toward the value area extremes suggests a directional intent from the market, while a return to the POC indicates a more rangebound price action.

Value Area acceptance or rejection: If an asset price opens outside the value area and moves back inside it, this suggests rejection of the breakout, also known as a fakeout.

Conversely, if a price breaks out and holds outside the value area, it suggests acceptance of new price levels and potential trend continuation.

These act as strong support when price approaches from above and resistance when approached from below, as many market participants have positions established at these levels.

• Support/resistance identification: Unlike arbitrary technical levels, Volume Profile identifies support and resistance based on actual market activity where traders have committed capital. This provides more meaningful and reliable levels compared to purely price-based indicators.
• Market structure clarity: Volume Profile reveals the underlying market structure, showing where institutional traders and large market participants have established positions. This insight into "smart money" activity can provide significant strategic advantages.
• Multi-timeframe applicability: Volume Profile works effectively across all timeframes and markets, from intraday scalping to long-term investing. The same principles apply whether analyzing cryptocurrency, forex, stocks, or commodities.
• Objective analysis: Volume Profile provides concrete, quantifiable data about where trading occurred, removing subjectivity from identifying key price levels and helping traders make more informed decisions based on actual market behavior.

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• Complexity and learning curve: Volume Profile requires significant study and practice to use effectively. Understanding concepts like POC, value area, and volume nodes, as well as interpreting their interaction with price action, requires considerable time investment and experience.
• The tool does not generate pre-made signals: Like most volume-based indicators, Volume Profile is built from historical data and doesn't generate clear signals for future activity. It shows where volume has occurred, not where it will occur, meaning traders must combine it with other analysis methods for forward-looking insights.
• Data quality dependency: Volume Profile accuracy relies entirely on the quality and completeness of volume data. In forex markets where volume data is often tick-based rather than actual volume, or in thinly traded instruments, the profile may not accurately represent actual market activity.
• Horizontal bars can clog charts: Having too much content on a chart can reduce its cleanliness and lead to analysis paralysis, with some otherwise clear signals that can be overlooked.