The volume profile is an advanced order flow study that displays volume distribution versus price over time. A volume profile displayed as a horizontal histogram on a chart can help identify important price levels, including support and resistance. This article will enlighten you with the basic concept of Volume Profile. You’ll be able to use the tool in your trading strategies which can help to filter trades according to the current market scenario.
What is the Volume Profile Indicator?
Volume is commonly used as a chart indicator showing the total number of contracts traded over a given period of time. Volume can be further segmented into buying and selling volumes, which helps traders identify market imbalances. Before the advent of the volume profile, volume data was limited to the x-axis and displayed as a histogram in the panel below the price information. Here’s how it looks on the chart.
A volume profile is essentially volume data displayed horizontally on a chart on the same chart panel as price data. Seeing volume at appropriate price levels gives additional insight into how the market reached its current price and, more importantly, where it might be heading next.
Volume Profile Strategy
Using any forex strategy, you can easily analyze the market trend with the volume profile to help you make an informed decision. Traders can focus on the volume area and look for a shift in the volume area or intraday. Let’s take a look at settings of the indicator.
You can alter the range period or range count. Increasing the values will result in reduced trading opportunities. Still, you can play with the settings, like increasing the values on lower timeframes. However, you might want to choose only tick volume as forex markets have no real volume available to retail traders.
Trending or range markets can be identified by analyzing the value area marked by the indicator. But keep in mind that the trend can change very quickly. This type of analysis only works with probabilities which you can improve by adding further technical, fundamental and price action analysis to your strategies.
With the help of this indicator, you can find whether the market is in the accumulation or distribution phase. Once you know the phase, you can take the position in the right direction.
Buy Signal
Let’s take a look at the potential buy setup.
- Keep an eye on the value zone marked by the indicator.
- Let the price reach the peak volume area and wait for it to break out on the upside.
- This is the accumulation phase, and you can enter the long position.
- You could place the stop-loss just below the peak volume level.
- You could place take profit near the next resistance level.
Sell Signal
Let’s take a look at the potential sell setup.
- Keep an eye on the value zone marked by the indicator.
- Let the price reach the peak volume area and wait for it to break out on the upside.
- This is the distribution phase, and you can enter the short position.
- You could place the stop-loss just above the peak volume level.
- You could place take profit near the next support level.
Conclusion
The volume profile indicator is a unique tool to identify the potential change in the market’s direction. However, the forex market has no real volume, and we can only use the tick volume. Therefore, you should experiment with the indicator on the demo account before going live to see if you think it will benefit your trading. Otherwise, you could always use the default volumes indicator which I think does just as good a job at discovering the current volume on a particular currency pair.
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