Advanced Forex Blog

How to Use Volume Profile With Your Trading Strategy

May 2, 2021 | 10:14 am | Advanced Forex Blog
May 2, 2021 | 10:14 am
Advanced Forex Blog
How to Use Volume Profile With Your Trading Strategy

What is a volume profile?

Volume profile is an auxiliary trader’s tool with which you can determine the significant levels that prominent market players take into account in their trading. It is also known as horizontal volume. 

The value of this tool is that it can be combined with almost any trading strategy. After analyzing the market using horizontal volumes, you get a more reliable signal that can be used to confirm or deny the received entry point.

 

What is a volume profile?

 

In this article, we are going to discuss how to work with horizontal volume in Forex. However, similar techniques can be used in other financial markets.

Not to be confused: horizontal volume, market profile, and vertical volume.

Horizontal volumes (volume profile), tick volume, and market profile are different instruments that appear similarly on the chart.

Market Profile Volume profile Vertical volumes
Indicates the zones in which the price is spent 70% of the time during the trading day. Show the degree of interest of large exchange players to horizontal levels. Show the degree of interest of the players (the number of contracts or transactions) for a certain period of time. Not tied to price levels.

 

General characteristics of volume profile

Horizontal volumes are displayed on the chart as a level scale. With their help, you can determine the price at which market participants made the maximum number of transactions. The strongest and most significant level is easy to identify visually. It will be represented by the longest bar.

The chart below shows the horizontal volumes of the forex market added to the hourly chart of the USD/JPY pair. By the long strip, you can immediately determine at which level the major players entered the market.

 

General characteristics of volume profile

 

Volume profile analysis

The following two concepts are closely related to horizontal volumes: 

  • accumulation 
  • distribution

 

They should be taken as the logic of any major player who enters the market and takes money from most traders. Let’s see how it works.

Accumulation phase

It corresponds with the price movement in a narrow trading range. Here, market sellers and buyers open multidirectional trades and wait for the trend.

The “Accumulation” phase is considered complete when a major player sees a clear preponderance of orders to one side. For example, 70% of traders trade up and 30% trade down. In this case, he is ready to move on to the next stage.

Accumulation phase

Distribution phase

If most traders have opened buy positions, then a large player needs to move the price down to make money. In this case, a strong downtrend begins, and the bulk of users close at a loss. After that, the market again enters the “Accumulation” phase and waits to form a new ratio of buyers and sellers.

 

Distribution phase

 

Action zone

If you have horizontal volumes in front of your eyes, then you can quickly determine the “Zone of value” – the place where the “Accumulation” phase begins. That is, you will not open trades in random places, but exactly where the price makes meaningful stops and prepares for distribution.

 

Action zone

 

How to work with volume profile – step by step instructions

Let’s convert all of the above into a step-by-step process.

  • You find the “Zone of Value” with the help of horizontal volumes.
  • Switch to your trading strategy and determine the direction in which you will trade.
  • Set Stop Loss and Take Profit.
  • Wait for the “Distribution” phase.

You can improve your chances of making money if you implement the described scheme and use the correct Stop Loss and Take Profit ratio.

The volume profile is a convenient leveling tool with which you can find meaningful entry zones. However, no matter how hard you try, horizontal volumes will not help you determine the direction in which the market will be distributed. This is insider information that is known only to a small group of people on the planet.

 

Examples of trading with volume profile

We have already found out that horizontal volumes help to determine the nearest strong levels. This means that with their help, we can find a profitable entry point and set benchmarks for Stop Loss or Take Profit. Let’s look at a few examples.

Buying

After the temporary consolidation, we saw the Bullish Engulfing pattern on the hourly USD/CHF chart. After the candlestick pattern formation, the candlestick fixed above the significant level determined by the horizontal volume. Based on these signals, we entered a long trade. Stop Loss and Take Profit are also set, taking into account the nearest extremes formed by the Volumes Profile indicator.

 

Examples of trading with volume profile - Buying

 

Selling

After a short growth, the AUD/USD currency pair entered a phase of consolidation. Further, the “Bearish engulfing” pattern was formed, and the price broke through the significant support level formed by the horizontal volume. The resulting set of conditions allows you to enter into a sell deal.

 

Examples of trading with volume profile - Selling

 

Conclusion

Horizontal volumes or volume profile is a special tool that helps to identify important horizontal levels. With their help, you can find an entry point, set Stop Loss or Take Profit. Horizontal volumes are an auxiliary element that can be part of almost any trading technique. It is undesirable to work with horizontal signals without confirmation signals. In this case, you will receive a lot of false signals. Horizontal volumes can be useful on any trading exchange like Forex, stock market, futures, commodity, spot. 

If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter.

Subscribe to our youtube channel.

Click here to check how to get qualified.

Click here to check our funding programs.

Share:

WE FUND FOREX TRADERS!

The5%ers let you trade the company’s capital, You get to take 50% of the profit, we cover the losses. Get your trading evaluated and become a Forex funded account trader.

Get Your Forex Funded Trading Account