Volume Profile - A Complete Guide (With Trading Examples!)
Volume Profile - A Complete Guide (With Trading Examples!)
A trading strategy should not only clearly define your edge but must
also define under what context you will execute that edge.
A typical “ah ha” moment for a trader is when they learn to use volume
profiles to build context around their trades.
As an order flow trader, volume profiles are at the core foundation of all
my trading strategies. By the end of this guide you will have a firm
understanding of how to use volume profiles.
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1. Open, High, Low, & Close: There’s different styles of volume profile
indicators but the majority of them will designate the OHLC.
2. Point of Control (POC): Price level where the most volume traded for
the session. Commonly referred to as the POC.
Prices above or below fair value are considered “unfair” prices (i.e., not
accurate reflections of the traded security’s true intrinsic value).
If these concepts are new to you, make sure to read this post on Auction
Market Theory.
Analysis of price in relation to high and low volume nodes is useful when
building context around your trades.
High volume nodes act like gravity. They tend to attract price and try to
hold it there.
Conversely, Low Volume Nodes are areas with low gravity. The market
often bounces right over these levels, not staying for long because
there’s not much gravitational pull.
This makes sense because low volume nodes are areas of low liquidity
where participation is low. Where as high volume nodes represent
where the most transactions took place.
Let’s take a look at the different indicators and their best use.
X-AXIS VOLUME
SESSION PROFILE
The session profile is the most common volume profile you will see. The
indicator will display traded volume at every price level for a user
defined session as an overlay… usually daily, weekly, or monthly.
Although this is the volume profile you have most likely seen the most
often, I personally find it the least valuable due to how the session profile
is typically displayed. It can be tough to analyze past profiles relative to
recent profiles. That is why I prefer the candlestick volume profile.
Most charting software packages give you the option to display the
candle as an out line (seen above) or as an individual candlestick to the
left of the volume profile.
Now that you’re familiar with the basics, let’s look at some volume
profile strategies you can use to improve your trading.
If this is the stage you’re currently in, applying the following techniques
to your current setups will result in a significant boost to your
performance.
In the above volume profile, price closed in the high volume node (value
area) seen by the grey candlestick.
In order for price to break away from value, either the buyers or the
sellers will have to become more aggressive than the other side.
When price is trading above a high volume node or value area it will act
as support.
Overall the market had been in a very strong uptrend as seen on the 2
hour chart. If you were looking for a place to enter a long setup, the HVN
of the prior bar highlighted in green is a logical place as we know the
buyers dominated the sellers at those price levels recently.
I also highlighted the price area of the high volume node on the one
minute chart on the right. Once price retraces back to this level you
would be looking for a pattern or signal to go long.
Price retraced back into the prior HVN and once again the buyer’s were
the aggressor and price rallied.
A logical place to exit some of this position would have been the HVN
that formed above highlighted in red as we already know sellers
dominated at those price levels recently.
This obviously doesn’t mean every setup you take at a HVN will be
profitable. However, as you begin to build more and more context
around your trades your trade selection will improve resulting in an
increased win percentage and R multiplier.
Low volume nodes are zones of low liquidity where price tends to skip
right over. Remember from earlier they are areas with “low gravity”.
For those of you familiar with market profiles, you can look at low
volume nodes similar to single prints.
If you trade a breakout strategy, tracking past low volume nodes will
help you find areas of low liquidity that can results in highly profitable
trades as they rip through the LVN.
Personally I track Low Volume Nodes on a Daily Chart and project those
zones on to my scalping charts. Let’s take a look at an example.
The distribution of a volume profile can help you determine the strength
of a trend and spot potential reversal zones. Let’s take a look at the five
different distribution types.
Bullish and Bearish profiles are useful to confirm trade setups as well as
confirmation you should continue to hold a position you’re in.
Bullish and Bearish neutral profiles signal a trend slowing down and a
potential reversal. You will commonly hear traders say there’s “Trapped
Traders” when a neutral profile forms.
The term trapped traders comes from the fact that either buyers are
long at an extreme of a session (bullish neutral profile) or short from an
extreme (bearish neutral profile).
You can use neutral profiles as a sign to take off some of your position
or for a potential reversal setup.
Volume profiles make it very easy to identify key support and resistance
levels from long term charts. Every morning before the open I update
my Daily and Weekly chart looking for new high volume nodes. (similar
to LVN’s discussed above)
Notice how price reacted when it intersected some of the stacked POC’s
on the the daily chart above.
These tend to be very strong support and resistance levels that can
result in explosive reversals.
This doesn’t mean I just go blindly long or short when price retraces
back to one of these levels. It’s beneficial to think of them as opportunity
zones where you will look for a setup.
Copying these levels onto the charts you use for your entries will help
boost your R multiple.
You’re also reducing your risk by locking in more profit faster than most
traditional trailing methods as seen in the example.
6. IMPROVE R MULTIPLE
R is the initial risk you take on a given trade, defined by your stop loss. As
traders, we define our profits in Multiples of R.
For example, if your initial risk on a trade $100 and you profit $300 your R
Multiple would be $300 (Profit) ÷ $100 (Initial Risk) = 3R.
So how can volume profiles help improve your R Multiple? It all starts
before the trade happens. We can use HVN’s and value areas to
estimate R for a given trade.
In the above example I’ve highlighted the current bars value area in
green since we’re trading inside of it and the prior bars value in red
(resistance) since we’re trading below it.
Knowing that price often will move through low volume nodes with ease
the HVN that formed above on the prior bar is a logical place to look to
exit the trade.
When determining whether to take this setup you can calculate the R
Multiple and if it fits with in your strategies parameters you take the
trade otherwise pass.
In the example below you can see our initial R Calculation is much lower.
4 (Profit) ÷ 3 (Risk) = 1.3R
You can see price rallied to the value area and struggled. Although this
setup eventually rallied, odds are you would have been stopped out.
Using context to improve your trade selection is key. You now have the
ability to build some context around your trades to build a better
estimate of your potential R multiple.
No matter what style of trader you are, you can use daily and weekly
volume profiles to label key support and resistance levels.
The 8 Hour profile is great to look at before the market opens to view
overnight activity which can indicate the direction the market will open.
The majority of day traders will use these time frames to build intraday
support and resistance levels.
If your average hold time is over 5 minutes I would focus on 30, 60, and
120 minute profiles.
Again, these are just some suggestions to get you started. You should
experiment with multiple time frames. Constantly testing and looking to
better define your trading edge is key for longterm success in this
business.
VOLUME PROFILE CHARTING SOFTWARE
If you’re interested in using volume profiles or any other order flow
trading tools, there’s a few charting software companies I would
recommend.
You need their $49 per month Order Flow package or higher to get
access to all of the order flow tools. I personally use their Pro package
primarily because I use multiple desktops.
The only knock I could give Sierra is their Graphical User Interface is
dated. Yet considering the cost and the speed of the platform, it’s still
one of the best I have ever used.
You need their $36 per month Level 5 package or higher for all of the
order flow tools like Number Bars which is Sierra’s name for footprint
charts.
CONCLUSION
Entire strategies can be built based off volume profiles or you can use
them to develop context around your trades. When implementing
Auction Market Theory and Volume Profiles the markets will become
much more transparent.
I always tell my trainees that I can give you the tools and the processes,
but the only way to become an expert is through experience which
means putting in the screen time.
You need to constantly be looking for ways to refine your edge, and now
you should have the confidence that you’re doing just that.
As you get comfortable with volume profiles here’s a list of more order
flow indicators to expand your knowledge.
If you have any questions regarding volume profiles I didn’t cover in this
post please leave a comment below!
ADAM
Checkout my Day Trading Course on Youtube!
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50 COMMENTS
TEX
AUGUST 1, 2022 AT 11:41 AM
Reply
ADAM
AUGUST 1, 2022 AT 12:56 PM
Reply
ANDREW
AUGUST 27, 2022 AT 9:42 PM
Hey Adam, great article. I use motivewave also. You mention that you
mark up the higher timeframes and show that information on your
lower timeframe entry charts. Is that automatic or do you manually
have to do that? Do you have a workspace you can share?
Reply
ADAM
AUGUST 28, 2022 AT 2:30 PM
Reply
PAUL FOSTER
OCTOBER 7, 2022 AT 7:28 PM
This is a fantastic article. I appreciate the time and effort you put into
explaining it thoroughly and artfully. Do you have any literature
available that explains how you determine what area you select to
define the time interval that you pull the profile from? In other words,
from where to where do I pull the profile? I know it probably varies based
upon strategies and whatnot, but is there a basic general rule? I have
been trading for two years, primarily using S/R levels and MA’s along
with BBWP and Stochs for trend identification, but I have not integrated
any volume profile analysis into my trading. Thanks for this article. As
good as it gets on the internet.
Reply
ADAM
OCTOBER 8, 2022 AT 2:36 PM
Reply
RAMA
DECEMBER 25, 2022 AT 5:33 AM
Reply
ADAM
JANUARY 14, 2023 AT 11:21 AM
Thanks Rama!
Reply
FREDERICK ATWATER
OCTOBER 19, 2022 AT 1:06 PM
I don’t see too many traders that post anything relevant as to how to
actually trade, but your site and explanations are spot on.
Volume profile allows the retail trader to interpret what the large money
is doing to move the market, but only with proper training and practive.
All we can do is follow the big money, and almost no-one teaches this.
Cheers,
Fred Atwater
Reply
ADAM
OCTOBER 19, 2022 AT 7:30 PM
Thanks for the kind words Frederick! Truly appreciated. Volume profiles
are incredible, they’re at the core of everything I do.
Reply
ALPHA
NOVEMBER 10, 2022 AT 2:31 PM
Hi Adam,
I believe you made a typo with regards to Neutral profiles. You meant to
say, “Price closes inside or near fair value, but does **not** close
beyond”.
Reply
ADAM
NOVEMBER 21, 2022 AT 8:39 AM
Reply
MEHROOZ
DECEMBER 11, 2022 AT 6:38 AM
There are always many new things to learn . Even if you are a successful
trader. This was one of them.
Reply
ADAM
JANUARY 14, 2023 AT 11:18 AM
Glad you liked the post Mehrooz. VP’s are very useful.
Reply
JODY
MARCH 10, 2023 AT 3:42 PM
Reply
ADAM
MARCH 12, 2023 AT 9:51 AM
Reply
HARVEY
MARCH 25, 2023 AT 2:39 AM
Reply
ADAM
MARCH 26, 2023 AT 6:42 AM
Reply
STEVEN
APRIL 5, 2023 AT 9:06 PM
I’ve taken courses on the topic and so far your explanation was the
easiest to understand; awesome!
Thanks,
Reply
ADAM
APRIL 6, 2023 AT 6:03 AM
Thanks Steven! You can build a solid strategy simply with volume
profiles. I use cumulative delta and nyse tick as well.
Reply
NAVEEN PUROHIT
NOVEMBER 29, 2023 AT 10:49 PM
love you …..dear from india
plz make another video on footprint charts long video
Reply
ADAM
NOVEMBER 30, 2023 AT 6:00 AM
Reply
MUSTAFA
DECEMBER 2, 2023 AT 4:36 PM
Hey there, great website you got going on here. It has been very helpful
with my understanding of Order Flow trading, and I’m sure it has helped
many others. I have a question for you: Do you think that its smart to pull
potential SL and TP levels from a lower time frame than the one that is
being traded? Or is this entirely discretionary?
Reply
ADAM
DECEMBER 3, 2023 AT 5:56 AM
Thanks for the comment Mustafa. Typically a trader will use higher
timeframe to build context, which can include helping you to
determine logical TP & SL. Lower time frames to determine entry…
Reply
BILL
DECEMBER 14, 2023 AT 12:21 PM
Great article. After reading this I watched a bounce off the previous
days VAH (Fed day). Interesting stuff!
Reply
ADAM
DECEMBER 14, 2023 AT 4:25 PM
Reply
SERDAR
DECEMBER 17, 2023 AT 10:50 PM
Hi Adam,
Great content and I am learning a lot! I have pro membership on
Tradingview. I can’t seem to find a candlestick volume profile indicator
on it though. Are you aware of any?
Thanks in advance!
Reply
ADAM
DECEMBER 18, 2023 AT 1:05 PM
Reply
SAHAR
JANUARY 1, 2024 AT 11:02 PM
his dear Adam, your are such a legit and professional trader in the
whole YouTube, thank you for your effort that you put in your videos, I’m
a student and I’m 19 years old from Canada, I’m a beginner in here and
your content has benefited me tremendously. can you please be my
mentor, I have recognized that I need a mentor in order to be
successful, and I know you will be the best mentor for me. can you
please accept my request?by the way I’m a female
thank you Sahar
Reply
ADAM
JANUARY 2, 2024 AT 9:00 AM
Hi Sahar, thanks for the comment! I think it’s awesome that you’re 19
and pursuing day trading including the fact that you’re a woman. The
industry needs more women, they can make great day traders!
Unfortunately I know longer mentor in person, so the best I can offer is
YouTube. I will do my best to answer any questions you may have on
YouTube. Thanks for the kind words, truly appreciated.
Reply
ROBERT SUTEU
JANUARY 20, 2024 AT 5:33 PM
Reply
ADAM
JANUARY 22, 2024 AT 3:48 PM
Reply
TIMSK
JANUARY 21, 2024 AT 10:41 AM
Hi Adam,
Second comment from me today: really good article and I enjoyed your
video on volume profile as well – thank you.
Reply
ADAM
JANUARY 22, 2024 AT 3:46 PM
Won’t work with range charts, there will be too much variation in the
amount of volume traded per profile in my opinion. You won’t have any
set variable that you’re comparing it to such as time.
Reply
SARA
JANUARY 23, 2024 AT 12:46 AM
hello, can you do a tutorial on how to set up the volume profile on ATAS
or motive wave platform, like the one you have shown?
Reply
ADAM
JANUARY 24, 2024 AT 2:53 PM
I’m not familiar with ATAS but if you signup for my newsletter you can
download my chart template for MotiveWave.
Reply
BU DANA
JANUARY 30, 2024 AT 6:17 AM
Please Advice…
Reply
ADAM
FEBRUARY 9, 2024 AT 7:13 AM
No experience with Atas. Personally I’m not a fan of Ninja but I have
had students who use it and like it.
Reply
MIKE LEE
JANUARY 31, 2024 AT 10:01 AM
Reply
ADAM
FEBRUARY 9, 2024 AT 7:12 AM
Reply
PABLO
FEBRUARY 4, 2024 AT 8:30 AM
Reply
ADAM
FEBRUARY 9, 2024 AT 7:11 AM
Thanks Pablo! Right back at you!
Reply
ILYA
FEBRUARY 9, 2024 AT 2:42 PM
Hello Sir,
Thank you,
Reply
ADAM
FEBRUARY 10, 2024 AT 10:00 AM
Reply
WILL
SEPTEMBER 6, 2024 AT 6:54 AM
Hi Adam,
Really enjoying your blog posts. I’ve learned more about volume trading
and footprint imbalances from these than anywhere else that I’ve
looked for this information. Hope that you release more blogs or YT
videos soon (I saw mention of a phase three of the Order Flow Trading
series, would be great). Thanks for what you do.
Thanks again,
Will
Reply
ADAM
NOVEMBER 3, 2024 AT 5:55 PM
Awesome to hear Will. I’m not very familiar with Quantower but I’ve
taught a few people in the past who used it and were happy.
Reply
HARRY
SEPTEMBER 17, 2024 AT 3:25 AM
ADAM
NOVEMBER 3, 2024 AT 5:54 PM
Thanks Harry!
Reply
OZKAN
NOVEMBER 1, 2024 AT 5:26 AM
Reply
ADAM
NOVEMBER 3, 2024 AT 5:51 PM
Reply
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