Volume Profile

The Essence of the profile

As promised I am currently onboard a 14 hour flight and have decided to try and write some longer form content for my followers and settled on the profile as this is easier to write about based on the information off the top of my head. I will talk about what it is as well as how to potentially use and then elaborate on how I personally use it, just a reminder that I will try and keep it concise as always as to make sure that I don’t waste your time. Make sure to Share this post if you would like to see more.

Basics

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The volume profile itself can be seen as a normal distribution with approximately the middle 70% of trading activity and "volume" constituting the value area, thus leaving the remaining 15% on each end as the outliers and considered to be out of the "value" and thus are not "fair" prices in the auction market process. These measurements are commonly used by classical profile traders, who tend to sell the prices that are not "fair" in the upper 15% and buy the prices that are not "fair" in the lower 15%. In my opinion, this strategy is destined to fail in markets like today's where these reversions don’t occur as often and when they do occur, the drawdown experienced often exceeds 10 or more points on the ES, with the reward for such a trade also being very minimal. Nevertheless, some traders swear by the classical interpretation of the profile and are supposedly profitable in trading mean reversions in this manner, which suggests that this interpretation hasn’t become completely useless yet.

Another common theme that I often see is that people highlight the shifting of the VPOC. Personally, I don’t find any practical use in this as a more coherent argument is to use Value area shifts which are more reflective and in my opinion and are also more useful for the vast majority. I digress however , these are not essential for trading off the profile.

Figure 1 - An example of a profile with the 70% distribution in the middle and the 15% regions shaded on each end

Knowing the theory is a great way to understand the rationale behind certain trading strategies but on it’s own it will not make you a better trader ; knowing the normal distribution and the balancing it represents is not going to help you on it’s own and that’s why I will continue to expand into Strategy.

Strategy and Practical Use

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There are a few key components that may be used when trading off the profile.

• HVN’s

• LVN’s

• Acceptance

• Ledges

These components constitute the vast majority of my volume profile oriented trading and I will be trying to explain these in detail, particularly what they mean for me and how I manage to use them.

HVN or a High Volume Node can be seen as a bulge or a block on the volume profile and represents an area where a relatively large amount of trade has occurred over the course of a few ticks.

LVN or a Low Volume Node is an area where little to no volume has been traded and can be seen as very slim areas or in some cases as ‘pockets’ where very minimal volume is traded

I will expand on ledges and acceptance shortly, but first I will explain how I trade off LVN’s and HVN’s in these dynamic markets. A LVN is a key part of my trading. This is largely due to the fact that the tops and bottoms of these areas can mark very good entries as trade "fills" them out, leading to very fast and responsive orderflow in these regions. I often use LVN’s to mark out target areas for me in a trade. An example is that if trading begins to occur within a previous day’s LVN, I will typically target the top/bottom of the LVN as I expect the profile to "fill" out and for trade to occur.

This is particularly well highlighted in Figure 2 below. Once $NQ entered the LVN from the prior day, the top of the zone became resistance and we ended up filling it out and trading to the bottom of the LVN, where my take profit would’ve been located. Note that if I use this for take profits, it can also be used on its own to make a trade with constructive orderflow, but I tend not to take this approach and almost always use these areas to mark take profit zones.

Figure 2 - $NQ on the 15th and 16th of December

HVN’s on the other hand are usually distinguishable from their LVN partners in the fact that they are usually indicative of fair prices and thus have much slower price action and on their own they sometimes mark the worst possible entries a trader can have. A rule that I have for my own trading is that I will always scratch or exit a trade when the level I have entered at becomes a HVN, I cannot state how many times this has saved me from watching my screen for hours as well as saved me from some sizeable losses.

Acceptance is a theme which I will carry forward from the last paragraph on my entry becoming a HVN. When a level tends to show acceptance it usually leads to the formation of a HVN and indicates that the prices being traded are seen as fair and thus usually leads to the continuation of momentum in any specified direction.

Ledges are on the few methods of deriving entry points that I support. These tend to be areas in the profile that protrude outwards and often highlight ‘responsive’ buying or selling at those areas . These regions can then be used the next day in conjunction with some other metrics such as Orderflow to mark very good entry points as well as targets on any single trade.

Concluding Thoughts

As stated earlier in the post , I tend to keep these short and concise in the hope that I don’t waste your time. I have tried to explain certain terms as well as explaining the rationale behind why I personally do specific things. If you wish to learn more about these topics I highly suggest reading Steidlymayer on Markets series with a particular emphasis on the second edition. These ‘seminars’ that are produced by the likes of Jim Dalton are not necessary and perhaps even discouraged by me, I highly emphasise self learning through trial and error.

Anyways , If you enjoyed this please share it and drop me a comment . Peace ✌️