The Volume Profile is an advanced charting study and indicator that discloses trades that have been done for a certain period at different price points. This trading indicator offers traders access to information on the price where the security or asset was traded the most during a period.
As a charting study, users can access previous traded volume, as well as plans as everything is being derived from historical data. The Volume, in this case, refers to the number of transactions that were done in relation to the asset being looked at. Traders use this chart for different reasons, and one of them is the measurement of liquidity. Those assets or securities that have a high volume are seen as being more liquid compared to their counterparts.
Volume Profile is a tool utilized by both individual traders and institutions to flesh out easily understandable information concerning the buy volume and sell volume of an asset. Typically, this chart tends to separate the total volume of an asset that was traded in a period into the buy volume and sell volume.
When the Volume Profile bar of an asset is large, it means that more volume was traded at that specific price.
People use the Volume Profile Trading Indicator to trade, gain a better understanding of the market, make a rational decision or merely improve one’s knowledge of risks attached to the market. Traders can spot areas of support and resistance while detecting spots unlikely to contain either.
People erroneously believe that Volume profiles are the same as Market profiles. The former is meant to analyze the number of assets that are traded at a certain level, while the latter is designed to look at the length of time a price was traded at every level. This means that volume profiles are volume-based, while their counterparts are time-based.
How to add Volume Profile to TradingView
TradingView is an effective trading tool utilized to access a wide array of real-time data and news that are important in decision-making. Adding the Volume Profile bar into TradingView is possible. TradingView added a new indicator into its hub of Volume Profile indicator tools called the Volume Profile Periodic Volume (VPPV). VPPV is a tool used in creating volume profiles for a period that spans more than a single trading day. The user can customize the Period parameter.
Every Volume Profile feature that TradingView offers comes with the higher and lower value boundaries, which are the Value Area High and Value Area Low.
In TradingView, the Volume Profile feature can be accessed by clicking on the Indicators and Strategies options on the top of the screen, then a menu bar is displayed. The user should click on the Volume Profile option. Once this is done, different options pop up, which are fixed range, session volume, session volume HD, and visible range.
Traders can add multiple options to their chart at the same time such as fixed range and visible range. While selecting an option, the trader can choose their starting point and ending point for their analysis. Users can view the levels that attracted the most price volumes within the region of the period that they chose.
How to use the Volume Profile
Volume profiles have multiple shapes that represent different things, and they are D, P, b, and B shapes.
- P-shaped Volume Profile
This shape means that the market has risen sharply and consolidated when it climaxes to the upper end of a P-shaped profile. At the highest point, buyers and sellers reach a balance. The portion of the chart where the P-shaped is thin, it means that there was a low trading volume at that time. As one travels upward to the upper part, one can see that a new price has been struck.
Sometimes, traders may view the P-shaped as signs of a bull market.
- D-shaped Volume Profile
When the trader sees a D-shaped forming in the chart, it means that a temporary balance has been formed. The highest level of trading volume concentrates centrally, meaning that buyers and sellers have found a way to strike a balance. When this occurs, the market may be viewed as lacking direction since both buyers and sellers are not aggressive. Sometimes, it may end up in institutional traders improving their position.
- b-Shaped Volume Profile
If the market plummets sharply and consolidates, a b-Shaped Volume Profile is formed. This may be formed when long liquidation occurs. At the topmost part of the b-Shaped, which is thin, one can decipher an unfair price perception, as well as a low trading volume. At that moment, traders are selling and it ends once a balance is found.
When it gets to the bottom section with a wider area, it means that a balance has been reached between buyers and sellers.
This type of shape is viewed as a bearish signal because longs are exiting the market. It is common to see the shape when the market is facing a downtrend, but this does not mean it can’t be visible in an uptrend. When the latter occurs, it means that a reversal has occurred.
- B-shaped Volume Profile
When a period has two D-shaped profiles, the B-Shaped Volume Profile is created. Sometimes, traders tend to analyze them separately. It is generally seen as a continuation of a trend. Traders are advised to check which PoC is more dominant to know where the level of activity is greater. Point of control or PoC is the price of highest traded volume for the timeframe being looked at.
Here is a video by Tradingview going over the indicator:
The importance of analyzing past data can’t be overemphasized for traders, and this is why they utilize trading indicators that make it easy to analyze historical data. Volume Profile is meant to disclose the volumes that are traded at different levels.
The major difference that exists in the three types of volume profiles is how they are displayed on the chart and what they intend to achieve.
It is important to note that trading comes with risks and utilizing indicators does not absolve the trader of the risk. If you would like to take a complete crypto trading course check out our Crypto Trading Bootcamp.
Bulls on Crypto Street is a trading education website dedicated to digital assets such as Bitcoin, Ethereum, DeFi, NFTs, and other new advancements in the Metaverse.