Volume Profile

Background

As of 2021, these are the largest participants in the Forex markets.

The big banks make up over 70% of the total volume.

To give this even more perspective, retail traders make up only about 3-4% of all trading volumes.

You and every trader you follow on twitter are at the absolute bottom of the pile in terms of market moving capability. Combined, just a speck of dust.

In order for these big players to deal profitably in currency, they must deal in very large size. This allows us to track their activity.

---

Volume at Time

Most people who've used any trading software are familiar with a 'Volume' indicator.

It sits along the bottom of your price chart and looks something like this.

This tells us how much volume occurred during a specific time. That is, the price in our chart is denominated in candles of a specific timeframe. If we are viewing price on the 1Day timeframe, then each volume bar is also 1Day; We can see how much volume occured in a given candle.

There is another post on Volume, here, which cover this indicator in more detail, but traditionally it is used to put weight or conviction behind a price move. I.e., if price were to break a line of resistance on a daily candle, with strong (higher than average) daily volume, we are less likely to fade this move than had there only been minimal volume. Volume represents the number of transactions/trades that have taken place in that time period - so, if there was a lot of volume, a lot of contracts changed hands. If there were a lot of trades happening and the high time frame (daily) candle closed above a prior level of resistance, it indicates acceptance above this level. I.e., after the indecision was resolved, prices closed higher.

---

Volume at Price

On the other hand, we can show the amount of volume traded at a price, rather than time.

It looks something like this;

Example 1

or;

Example 2

This is known as a volume profile. It shows how volume was distributed across the price range.

Subsequently, this tells us which price levels garnered the most interest, and as the big banks and hedge-funds above represent the largest portion of the trading taking place, you can deduce what prices they trade at.

---

Using Volume Profile

There are various forms of this indicator on TradingView;

- VPVR (Visible Range, Volume Profile

- AAVP (Auto-Anchored Volume Profile)

- Fixed Range Volume Profile

All of these 3 indicators work on the same idea, but give you different levels of flexibility;

VPVR will give you the profile of the price action visible on your screen. If you zoom in or zoom out, the profile updates so that only the visible price action (the visible range) is contained in the volume profile.

AAVP will let you set a range in it's settings, for example the previous week, and show you the volume profile for that timeframe. The profile is then 'auto-anchored' to the prior week/month/year. You can of course use VPVR and just zoom in or out until only the weekly prices are shown and this will have the same effect.

Fixed Range will let you drag your mouse from a starting candle to an ending candle, and the volume profile will be calculated over this range.

Indicator Characteristics

Each of these indicators will contain the following;

- PoC (Point of Control) - the price level in the profile with the highest traded volume. This is represented with a red line. In Example 1 above, around $9,000

- VA (Value Area) - If you're familiar with distributions, 1 standard deviation contains 68% of all the data points. In a volume profile, the Value Area by default is set to 70, but the idea is that this area contains the majority of the periods volume. You can manually change this in the settings but it is typically set to 70. In Example 1, you can see the area above $34,000 is shaded darker, this is because it is outside of that 70%. The Value Area then, is all the prices between $4,000 and $34,000. In Example 2, the Value Area is between $27,200 and $29,200.

- (VAH) Value Area High - The highest price within the value area. So the highest price within the aforementioned 70%. This is just the boundary between the value area and the unshaded area above it. In Example 2 it is more clear, the upper blue line is the VAH.

- (VAL) Value Area Low - The lowest price in the Value Area. Represented in Example 2 by the lower blue line.

High Volume Nodes

Areas in the price that have a significant amount of volume traded in them stick out like a sore thumb in the volume profile. They form obvious peaks and we call them high volume nodes, or HVNs. It's just a fancy way of saying there was a lot of interest in this area and a lot of trading happened. The PoC will be identified automatically (it's the highest of high volume nodes). The others, we just have to eye-ball.

HVNs represent areas of consolidation - where there was general agreement or balance between buyers and sellers. As such, HVNs and particularly the PoC, represent areas of 'Fair Value.'

Similarly, we have Low Volume Nodes, where not a lot of trading took place. Price moved quickly through these areas, finding consensus either higher or lower.

Addendum; (Forgive me, I'm not a quant and this is likely wrong, and I'll hopefully update it over time as my own understanding improves)

Quants assert that price is stochastic, which means it can be well described by a random probability distribution, most commonly; the normal distribution (bell curve) which has a mean and mode in the middle, with tails on either side. What we assume then is that prices should fluctuate around their mean (the HVNs in the volume profile), spending most time in the Value Area (1 standard deviation from the mean). As price moves away from the value area towards 2 and even 3 standard deviations from the mean, the less likely it is to remain there, and should return to the mean (mean revert), or migrate back to fair value. As such, areas outside the value area can be expected to reject price quickly, which is visible on the chart as it being supported or rejected.

________________________

Now,