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Is Volume Profile worth learning or is it an outdated concept?
Hi I am a newbie to FIO, trading on intraday basis since last 3 years, and VP + MP has definitely improved my trading path.
Why I shifted towards MP, VP, OFA?
I am also a price action trader and was also looking to find out why my bad trades were happening despite of following all my rules. I did not know knew anything about value, imbalance, where the stops are getting built and other references that MP, VP provides. I slowly understood my mistakes and moved away from the indicators. I started to develop my own trading framework (with MP, VP, OF) and market understanding that supports my trading decisions.
How I use MP, VP with Price Action Trading?
MP and VP helps me to understand the market context which is helping me to develop trade scenarios or the auction paths in terms of likelihood of the market movement. Being an intraday trader, I only use daily time frame analysis and then shift towards 30-min MP, VP and then see where the aggressive buyers and sellers are coming from 5 min OF charts. I put a lot of importance to the POC as that is the level where major volumes and auction development has happened, and I use it as a level of support/resistance. Previous Day High & Low are my favorite entry and exit reference points.
I mainly trade the Indian markets and my favorite trading instrument is Nifty Futures (NIFTY_I) as it has got a lot of liquidity and price action.
What should you do?
I would suggest to first identify your personality and then jump the gun. I am a high risk taker and it took me 2 years to finally find a trading framework that suits my personality. Also you need to give a lot of time to develop your market understanding and develop your own trading framework using MP or VP or OF. These are just methodologies, as one my friend has become fairly successful in trading by only using two EMAs, but that style does not suite me. So identify your personality and trading style as a simple moving average can also make a big difference in trading if you know how to use it on your own.
Sorry for the long post, but sharing some thoughts.
The most significant difference of Market Profile charts to other charts is that it views market activity in terms of value. By definition, market value for any given financial instrument is the price range or price area where the market has found buyers and sellers equal in strength.
Once the trading range for the session is established, one of two things may happen. The market will either continue to trade within
the range, or the auction will drive prices above or below the established range, only to create a new auction range.
Once the auction market identifies a range with an unfair high and an unfair low, it begins to negotiate within the identified range to establish where value will occur. The market trades between the established high and the established low in search of an accepted value area. Once a value area begins to develop in the range, the market will start to probe above and below the new value area in search of the next trading range.
The value area on a Profile chart contains 70 percent of the market’s trading activity for the specified period. The value area high and the value area low provide the boundaries of the value area. The value area high is the upper limit of the value area for the market data and the value area low is the lower limit of the value area of the market data.the value area is developed based on real time market data and actual market activity,
The Market Profile charts allow traders to view and track the value area as it develops.
A growing or expanding value area indicates acceptance in the market for the directional expansion in the value area. An expanding value area usually indicates
the presence of increased or sustained trading volume that is fueling the expansion. A small value area range that is not growing is a sign
of an uncertain market, a market with low trading volume that is not committed to any specific direction in the market.
I'd ignore value area concepts in VP. It's irrelevant since it only applies to a normal gaussian distribution, which you're not going to get anywhere near frequently to care about.
Here's the spot DAX today. Where would people take a trade? Well, I closed out one from the 1st SD above VWAP as it moved up to the 2nd SD. And what do we have there? We've got a nice HVN which, before I took the trade, was a cluster of several hundred contracts, but a distinct bulge in the profile. VWAP was going up, price hit the bottom of that cluster, pull trigger long. That was about 40 points if you didn't get greedy (price hasn't moved back to 2nd SD, which shows you have people fading this move or buyers are out of bullets). If price just keeps trending up, then you simply buy pullbacks to the LVN below the present HVN and lean on that area. So long as VWAP indicates money flow is to the upside, you've probability on your side and can rinse and repeat this for any new volume cluster that becomes an HVN. You'll only be wrong once: the top.
Now I set my alerts for when the POC crosses the VWAP and, if and when it does, my bias will turn to a bearish sentiment. In fact, I could be fading this now as it seems likely this is already the case with so much volume amassing at the top. But I like high probability setups, so I wait.
What I'm saying is, the concept is easy to trade so long as you have good data feeds, and the opportunities on markets are many. You do still need to have some wits about you, since the way you use AMT depends on whether the market is trending or ranging, but anyone with any real experience watching their chosen instrument will know when the market is in such a condition.
I have been using volume profile as an adjunct to my trading for the past 18 months and I find it helpful. I am primarily a trend following/momentum trader. I use volume profiling to assist me in identifying support- resistance levels. It is not a trading strategy, it is simply a way to organize the market so u can see what the market is trying to do more clearly. I would approach learning volume profiling as a way to increase ur knowledge with regards to trading the market. It is likely that u would learn a "thing or two" that could improve ur already successful trading strategy.
Thanks for your explanation but I am not sure if I fully understand you. Could you not do the same by only looking at price and see where you have a breakout or a trading range?
@gnoppa You could, but you’d be missing information not shown in price only, namely the volume transacted at price. This gives you an indication as to where people are positioned and what value is. Without that, you’re assuming only that consolidation zones on whatever timeframe you look at are the important areas. Many times you will not see that the price chart has a line in the sand where price may stop and retrace or breakout, which is only evident on the profile.
For my method, it also indicates what the bias is for any trades given a finite data set, that being the session for the day. I want to have a better idea on whether price is going to breakout higher, or if a reversal is on the cards should the skew flip. Knowing the volume distribution for the session, along with session VWAP, gives me the trend, momentum and commitment of the moves.
Do we see aggressive selling at that low? How the price reacts? Is this aggressive selling being passively absorbed? Or is there selling exhaustion and sellers are giving up? What is the price doing when sellers give up? Or maybe there is aggressive buying at the low? Or maybe there is very little of participation of any side?
Who are the buyers and who are the sellers (big lot vs small lot delta analytics)?
Knowing answers for that questions is very important to build context. When you have context you can try to imagine what's the current most possible scenario.
On a simple bar chart without volume profile and without delta you simply can't answer those questions
I really don't see any value in delta that isn't gleaned from the profile itself. Likewise with the DOM, which can be easily spoofed and is really for scalping setups, the delta is either too slow or doesn't add anything to my trade position.
I reach a low of the day, and I see it coincides with an LVN delineating the previous session trade area and today's. If I'm wondering whether to get in, I have two options. I can see how price moves when it reaches this zone, whether it begins to slow and congest or accelerate as sellers hit into the bid via the momentum, or I can watch the VWAP and see if this has shown a marked increase in slope to the downside.
If I see that we've broken down below the POC and VWAP is flat or slightly trending down above it, then I consider it a low probability breakout. After all, the majority of the session volume has traded well above these prices, so in all likelihood, even if we do breakout, it probably won't follow through and become a trend. This, of course, is not a guarantee.
If the breakout fails to bust into the previous session's range through the low volume, then the next likely thing to happen is that buyers step in and take charge of the break and reverse it, in all probability going to the opposite extreme.
All I'm saying is, I don't really need to check the price ladder or another volume metric when I already see what the market is trying to do via the price and volume at price. I did try using the DOM to get better entries, but I'll be honest, it was noise to me and especially when you're day trading spot FX, highly dependant on the interbank and liquidity provider data feeds you can get access to.
EDIT: In fact, it looks like we have that scenario happening now, which I'm keeping an eye on.
EDIT 2:
The shorts got overextended and bumped into the longs clearing shop the day before. Guess the longs won, though @ 11712, you can see that a load more shorts probably puked and helped accelerate the move higher.
Now, typically, there is an 80% probability that we go to the other side of the range. This is where trade management is important, because my target has been slowly moving down here, but I have also been moving my stop to areas where price shouldn't break down without invalidating my trade hypothesis.
EDIT 3:
Took bloody ages, but we finally got there. Closed out for a twenty point profit when I thought a news item was hitting that would shake me out, then and re-entered for a lower SD target.
Market volume profile I feel is still quite relevant. Volume and price are the only 2 indicators that you can see in real instant time.
so this method along with Richard D Wyckoffs work are still effective ways to understand market action and behavior
Gary Fullett
There is a huge in trading commodities futures and options
This thread is for information purposes only
There is a substantial risk of loss in trading commodity futures and options. Past performance is not indicative of future results. The opinions expressed here are those of Gary Fullett, and are not to be taken as a recommendation to buy or sell commodity futures or options. This is for educational purposes only.
How do you feel about the Order Flow FOOTPRINT]? Do you feel it would help one improve entries and exits?
Additionally, I have a comment for all traders reading this blog.
Gary Fullet, is the best instructor as far as the Wyckoff technique is concerned. Bar none.
Years ago I was privileged to be trained in the Wyckoff technique by Gary. I can unequivocally state from personal experience that it is fundamental to ones understanding and analysis of price action.
