The Volume Profile indicator is a popular tool used in financial markets, particularly in technical analysis. It provides insights into the trading activity and volume levels at different price levels over a specified period of time.
Definition
The Volume Profile indicator is a graphical representation of the volume traded at various price levels. It helps traders analyze the distribution of volume and identify significant price levels where there is high trading activity.
Usage
Traders use the Volume Profile indicator to gain a better understanding of where buying and selling pressure is concentrated. By analyzing volume at different price levels, traders can identify areas of support and resistance, potential breakouts/breakdowns, and areas where prices may consolidate.
Profile Display
The Volume Profile is typically displayed as a histogram or a series of horizontal bars on the price chart. Each bar represents the volume traded at a specific price level. The length of the bar indicates the amount of volume traded, with longer bars indicating higher trading activity.
Key Components
The Volume Profile indicator consists of two key components: volume and price. Volume represents the number of shares, contracts, or lots traded during a given period, while price represents the level at which the trades occurred.
By analyzing the Volume Profile, traders can gain valuable insights into market dynamics:
- High Volume Nodes (HVN): These are price levels with the highest traded volume. HVNs often act as strong support or resistance levels because they indicate significant trader interest.
- Low Volume Nodes (LVN): These are price levels with relatively low traded volume. LVNs represent areas where the market has little interest. If the price moves through an LVN, it may do so quickly, indicating less resistance.
- Point of Control (POC): This is the price level with the highest traded volume within the specified period. POC is considered a significant indicator because it represents the price level where most trading activity occurs.
- Value Area (VA): The range of price levels where a specified percentage of the total volume was traded. Common values used for this percentage are 70% and 80%. The value area helps traders identify where the bulk of the trading activity took place.
- Value Area High (VAH): The highest price level within the value area (VA).
- Value Area Low (VAL): The lowest price level within the value area (VA).
-Can I use Volume Profile in Forex if there are no real trading volumes?
That is a very good question. Since Forex does not have a centralized trading venue like CME, for example, real trading volume data is not available. The volume you see in your MT4 and MT5 terminals is tick volume. The difference between real volume and tick volume is that real volume shows the number of traded contracts, lots, or shares at a certain price level at a certain time. Tick volume displays the sum of ticks at a certain price level at a certain time.
Of course, it is better to analyze real volume as it is more correct information. But this does not mean that tick volume cannot be used. If you analyze real volume and tick volume, they will have the same peak volume more than 90% of the time. So, tick volume is also a fairly accurate representation of volume, albeit with a slight deviation.
But it should be understood that the older the timeframe, the greater this deviation between real and tick volume will be. However since it is most effective to use the volume profile on intraday time frames, this problem disappears by itself.
-How to use the volume profile indicator property?
The volume profile is effective when used:
- Volume profile of the day;
- Volume profile of the week;
- Volume profile of the month;
- Volume profile of the flat accumulation;
- Volume profile of the trading wave.
Examples:
The Profit Volume Indicator is absolutely free for both MT4 and MT5 platforms.
It's important to note that while the Volume Profile indicator can provide valuable insights, it should be used in conjunction with other technical analysis tools and indicators for a comprehensive market analysis. Traders often combine it with price-based indicators, trend lines, and other technical patterns to make informed trading decisions.
