Volume Profiling with Job Part 1 of 2
In this edition of the OFL Blog Series, we’re going to be discussing the Volume Profile.\The volume profile itself is a display of volume that occurs at the price of the auction. So instead of placing the volume below the candlestick that you’re visualizing, this is displaying this on the y-axis, where price has actually been and you can see how much volume at that particular price has occurred to show the total volume traded as it relates to the price level the transaction has occurred.
Here is an example. On this example, what we can see is up here at 3516, there is much less volume than down here at 3500. This large lip of volume here is important. That’s called a high volume node. Down here, you can see where it diminishes and had a previous level of high volume. Where this volume occurs and how it grows during the session is ultimately what helps me guide my trading. And also where the lack of volume is, is certainly important.
A High Volume Node is a peak of volume around a price level. A Low Volume Node is a valley of volume, where very little price exchange occurs. The Point of Control is the absolute most volume of that session or that timeframe you’re visualizing. That can be an RTH session, that can be one week, that can be a day, that can be a five-minute candle. The Value Area High is the top of the 70% of the volume. The Value Area Low is the low of the 70% volume. We’ll discuss the value area here a little bit more in detail in a second. What we want to get under our belts is the high volume node, low volume node, the point of control.
If we look at this here, the yellow arrows signify the high volume nodes. We can see this large high volume node, this one here, and then this tertiary one up here. The blue arrows signal be low volume nodes, where there is lack of volume in exchange for the separate distributions. Low volume node here as well. The green arrow is where that white part of the volume changes to gray, and that top of that white is the top of the value. So, on the bottom side of this profile, would be the volume, or the bottom of the value area low. And so that’s not displayed on this particular chart. But you can see here is the value area high.
The high volume nodes are the peaks of the volume. Low volume nodes are where the valleys occur. The point of control is the red here. This red line signifies the largest of the high volume nodes, and is the area of most interest on the particular session or time frame you’re visualizing. The value area high and value area low is the top and bottom of the value area. The value area is where 70% of the volume occurs.
The value area, as we discussed here just a second ago is where 70% of the volumes of trades take place. We can look at the top and bottom of that are and we can mark that as a distribution curve. If we escape that range, we can say there’s less interest based upon the mean of a distribution curve. If we skip below, same and vice versa. As the value shifts, that’s important to show interest in that area. Volume builds simply interest in particular price. As you gather interest in that range, you’re getting together volume and as interest dwindles, you will also dwindle in volume itself.
When prices are in consolidation, they’re said to have found balance or value. As they move around, in what we would say is chop, they’re creating that value, they’re building volume and creating that value. When they move swiftly out of that range and they create a low volume area into the next range, they’re said to be seeking new value. And the previous area they were in, is said to be currently unfair. As price escapes value it breaks out into a new range and is seeking new volume.
When a price rejection occurs, price escapes, create a new area of distribution and shows that the prior range of high volume interest was no longer accepted. So as the auction takes place here, what we can see here on the left, is that we auction down, and as we action down, we see dwindling volume. It came down first, there was less interest. It came back into the primary meat of the interest, came back in to the low area, rejected again. And as it began to continue to auction upward, it was followed with volume. And so price rejection is simply price moving out of that range, followed with volume build.
How does volume work around the distribution? Kind of in the same way as an atom rotates around a nucleus, or around an electron. You can see how this electron rotates in a circular fashion around this nucleus. This is auctioning up and down, up and down to the edges, where it is no longer pulled towards the center of that volume area. If it were to escape this range, it would look like this. As it escapes, it goes to the next area of interest, and vice versa. And so these centers where we’re seeing the electron escape what’s called valence is moving to a new nucleus in creating a high volume area. That’s why the low volume nodes are a particular importance. Price typically moves swiftly or is protected to keep it in that range.
Kind of like this: price was distributing around I mean, you can see it rotate back and forth. And if it were to come up and not build volume, you can expect that to come back into the area of interest. That’s particularly important, especially for intraday trading for gauging your position, seeing how much interest is in the favor.
This is the Volume Profile Part 1. We’ve discussed high volume nodes, low volume nodes, and the value area high, the value area low, and the point of control. Volume is seen as interest at a particular price level. As interest dwindles and price can retrace into the area of prior interest, as long as it breaches the low volume areas. As it builds volume in the direction that it’s going, this shows more interest in that area and likelihood of a continuation.
Be sure to check out Volume Profile Part 2 for further discussion.
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