Volume Profile is an advanced charting tool that displays trading activity at specific price levels rather than over time. By showing where the most volume has traded, Volume Profile reveals important support, resistance, and fair value areas. In this guide, we will explore how to read and trade with Volume Profile.
What is Volume Profile?
Volume Profile is a horizontal histogram plotted on the price axis showing how much volume has traded at each price level. Unlike traditional volume bars that show volume over time, Volume Profile shows volume by price. This reveals where the market has accepted or rejected certain prices.
Key Insight: Price levels with high volume are areas where buyers and sellers agreed on value. Price levels with low volume are areas price moved through quickly, showing disagreement. This information helps identify true support and resistance.
Key Volume Profile Components
Point of Control (POC)
The Point of Control is the price level with the highest traded volume. It represents the fairest price where the most transactions occurred. The POC acts as a magnet for price and often serves as support or resistance.
Value Area
The Value Area contains approximately 70% of all traded volume within a given period. It represents where most trading activity occurred.
- Value Area High (VAH): The upper boundary of the value area
- Value Area Low (VAL): The lower boundary of the value area
High Volume Nodes (HVN)
High Volume Nodes are price levels with significant volume. These areas indicate price acceptance and often act as strong support or resistance. Price tends to consolidate around HVNs.
Low Volume Nodes (LVN)
Low Volume Nodes are price levels with relatively little volume. These areas indicate price rejection. Price tends to move quickly through LVNs, making them potential breakout zones.
Example: Reading Volume Profile
A stock has been trading between $95 and $105. The Volume Profile shows:
- POC at $100 (most volume traded here)
- HVN at $98 and $102 (consolidation areas)
- LVN at $96 and $104 (price moved through quickly)
- Value Area: $98 to $102
This tells you $100 is fair value, $98-$102 is the accepted range, and $96/$104 are potential breakout levels.
Types of Volume Profile
Session Volume Profile
Shows volume profile for a single trading session. Useful for day traders to identify intraday support, resistance, and fair value.
Visible Range Volume Profile
Shows volume profile for whatever period is visible on your chart. Useful for identifying longer-term support and resistance based on historical volume.
Fixed Range Volume Profile
Shows volume profile for a specific price range or time period you select. Useful for analyzing volume around specific events or price moves.
Volume Profile Trading Strategies
Strategy 1: POC Trading
Use the Point of Control as a key level for entries and exits.
- In uptrends, buy pullbacks to the POC
- In downtrends, sell rallies to the POC
- When price breaks away from POC with volume, trade the breakout direction
- Target previous POCs or value area boundaries
Strategy 2: Value Area Trading
Trade based on price relationship to the value area.
- When price opens above the value area, look for long opportunities
- When price opens below the value area, look for short opportunities
- When price opens inside the value area, expect range-bound trading
- Value area boundaries often act as support and resistance
Value Area Strategy Example
Yesterday's value area was $98-$102. Today, price opens at $103 (above value area).
Strategy: Look for long entries on pullbacks toward $102 (VAH). Target previous resistance or next HVN. Stop loss below $102.
Strategy 3: Low Volume Node Breakouts
Trade breakouts through low volume areas.
- Identify LVNs where price moved quickly in the past
- When price approaches an LVN, watch for a breakout
- Enter on the breakout with increased volume
- Target the next HVN or POC
- Price often moves quickly through LVNs, so momentum can be strong
Strategy 4: Failed Auction
Trade reversals when price fails to find acceptance outside the value area.
- Watch when price breaks above VAH or below VAL
- If price fails to find acceptance and moves back inside the value area, trade the reversal
- Target the POC or opposite value area boundary
- This strategy works best when the breakout lacked volume
Volume Profile and Market Types
Normal Distribution (Bell Curve)
When volume profile forms a bell curve with a clear POC in the middle and volume tapering on both sides, the market is balanced. Trade mean reversion strategies around the POC.
Bimodal Distribution (Two Humps)
When volume profile shows two distinct high volume areas, the market is finding two levels of acceptance. Trade breakouts from one area to the other or mean reversion within each area.
Trending Distribution
When volume is concentrated at one end of the range (POC at extreme high or low), the market is trending. Trade in the direction of the trend and use the POC as dynamic support or resistance.
Combining Volume Profile with Other Tools
Volume Profile and Support/Resistance
When traditional support/resistance aligns with HVNs, the level is stronger. When they align with LVNs, expect price to break through more easily.
Volume Profile and VWAP
VWAP and POC often converge around fair value. When they align, the level is particularly significant. Divergence between them can signal directional bias.
Volume Profile and Price Patterns
Use volume profile to validate chart patterns. A breakout from a pattern with strong volume profile support in the breakout direction is more likely to succeed.
Tips for Using Volume Profile
- Choose the right timeframe: Match your volume profile period to your trading timeframe
- Focus on recent profiles: More recent volume data is more relevant
- Watch volume at key levels: Volume confirms or denies moves at profile levels
- Be patient: Let price come to your levels rather than chasing
- Combine with context: Volume profile works best with overall market analysis
Track Your Trading Performance
Pro Trader Dashboard helps you analyze your trades and see how well you are identifying key support and resistance levels. Improve your volume analysis skills with detailed trade tracking.
Summary
Volume Profile is a powerful tool that reveals where the real support and resistance levels are based on actual trading activity. By understanding POC, value areas, and volume nodes, you can identify high-probability trading opportunities. Use the POC as a magnet for price, trade value area strategies for directional bias, and watch for breakouts through low volume nodes. Combined with other technical tools, Volume Profile can significantly improve your trading edge.
Continue learning about volume analysis with our guides on VWAP and Volume Price Analysis.