The cryptocurrency industry has become a different reality for many individuals, with an increasing number of traders and digital assets leading to growth in market indicators and trading tools. Among these tools is the Volume Profile, which has become popular among cryptocurrency traders due to its ability to visually display “total trading activity” at each price level over a selected time frame.
As a result, volume profile analysis has become an essential part of the technical analysis toolkit for many! Let’s untackle all about volume profile as a market profile indicator and understand what is volume profile strategy.
What is the Volume of the Profile
A Volume Profile is a charting tool that shows the total volume of trading activity that took place at each "price level" over a specified period. This tool provides traders with valuable insights into market dynamics that can aid in identifying potential trading opportunities.
Traders typically begin using the Volume Profile by selecting a specific time frame such as a day, week, or month and plotting the tool on a price chart.
The volume profile chart shows a clear visualization of the areas where trading activity was highest over a specific time frame, making it a valuable tool for recognizing significant support and resistance levels. Volume profile trading has been significantly benefiting traders. This chart is user-friendly and can offer valuable insights into market profiles.
Quick Review of Volume Profiles Strategy Uses
Day traders and investors both use and enjoy volume profile trading. When used in conjunction with other signs, it can be a strong icebreaker. Let's quickly go over the primary uses before their in-depth justifications!
Volume Profile Strategy is used to:
- Determine Key Support and Resistance Levels for Setups
- Define Logical “Take Profits” and “Stop Losses”
- Calculate Initial R Multiplier
- Define Strength of Trend
What are the levels of the profile
When using the Volume Profile indicator in trading, traders are referring to the different price levels at which trading volume occurred over a specific time period.
Among the significant levels that traders tend to focus on are:
- Point of Control (POC)
The price level that experienced the highest trading volume during the selected time frame.
- Value Area (VA)
The range of price levels in which a particular percentage of all volume was traded during the period. This percentage is usually set to 70%, but traders can choose their own value.
- High Volume Nodes (HVN)
These are the price levels within the value area that are highest, but not as much as the POC. HVNs can serve as important support or resistance levels and present trading opportunities.
- Low Volume Nodes (LVN)
The price levels within the value area that are the lowest. They may not be strong support or resistance levels and are often considered areas of price discovery, where the market is still attempting to determine fair value.
By analyzing these levels on the Volume Profile, traders can gain valuable insights into market profile trading dynamics and peak on potential opportunities.
It is important to note that these levels may shift and change over the time, as the market conditions and trading volume change.
Why is Value Area usually set to 70%
The decision to set the “Volume Area” at 70% is rather variable and may change based on trader preferences or the particular market being examined. Although it creates a good balance between catching the most important price levels and avoiding too much chart noise.
What Volume Profile Indicator is used for
As previously mentioned, the Volume Profile Indicator is employed for a variety of market profile trading methods and significant market developments. We briefly touched on the key uses, but let's go into more detail now. It is used for:
- Identifying key support and resistance levels
Support and resistance levels are crucial price points in a market that are associated with a history of price struggles to either break out of or sustain. Traders and investors place importance on these levels since they denote significant areas of supply and demand for the traded asset. The Point of Control (POC) and the Value Area (VA) are frequently identified as strong areas of support and resistance, respectively.
- Determine Logical Take Profits and Stop Losses
Volume Profile indicator can be used to help determine logical take profits and stop losses by identifying key support and resistance levels in a market.
Places with high trading volume will always be a level of support and resistance. If the support or resistance level has been broken through and there is no trading volume in the range - that section of the value of the asset can be overcome extremely quickly.
- Calculate initial risk reward multiplier
Risk Reward Multiplier is a concept used in trading and investing to help determine the amount of risk that should be taken on a trade or investment. Trading volume will allow you to properly set Stop loss and Take profit levels and compare them with your Risk / Reward strategy.
- Analyzing market sentiment
Trading volume distribution across various price levels might give traders insight into market sentiment. For instance, a high volume at a certain price level can mean that traders are bullish on the market at that price level.
- Confirming price trends
Traders can use the Volume Profile to confirm price trends. For example, if the volume is increasing as the price is rising, it may show that the trend is strong and likely to continue that way.
Volume Profile Strategy
A Volume Profile strategy is a trading approach that uses the Volume Profile indicator to find specific market opportunities! Here are some common Volume Profile strategies:
- Identify the timeframe and market being analyzed
It's vital to choose the precise market and period that you want to analyze because Volume Profile research can be performed on any timeframe and any market.
- Trading Breakouts
The Low Volume Nodes (LVN), which may serve as areas of price discovery, can be found using the Volume Profile by traders. A shift in market sentiment and a trading opportunity may be signaled when the market breaks out of these zones.
- Confirm signals with other technical indicators
Analysis of the volume profile can be combined with other technical indicators to confirm signals and help traders make better trading decisions. In order to validate a buy or sell signal discovered by Volume Profile analysis, traders can, for instance, employ a moving average crossover or RSI.
While it's crucial to have a solid trading strategy, it's equally necessary to bear in mind that every plan requires ongoing monitoring and modification. In order to confirm trading signals and prevent false signals, the Volume Profile technique should be used in conjunction with other technical analysis tools, including as price action signals, trend indicators, and oscillators.
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