We are happy to inform you that we recently introduced and integrated the Volume Profile indicator on the FYERS Web and the FYERS App platform. You can now access it by clicking the Indicators tab and then choosing “Volume Profile Visible Range”. This would then display the indicator on your chart. The objective of this blog is to brief you about this unique indicator. Over the course of the blog, we shall talk about:
- What is ‘Volume Profile’?
- Indicator settings
- How to use volume profile?
- The time frames on which volume profile can be used, and
- Combining volume profile with other indicators
So, without wasting much time, let us get started right away.
1 What is ‘Volume Profile’?
If you have used charts previously, you would be aware of how volume is displayed. To iterate, volume is displayed in the form of vertical bars, or histograms, along the X-axis. Each vertical bar represents the volume for a particular period. For instance, on the daily chart, each bar shows the volume for 1 day; on the weekly chart, each bar shows the volume for 1 week, and so on.
The volume profile indicator is different. This indicator displays volume not as vertical bars along the X-axis, but rather as horizontal bars along the Y-axis. Put it in other words,
“Volume Profile indicator displays volume across price, rather than volume across time”
Each horizontal bar represents the volume for a particular price over the chart area that is currently under display. As a result, zooming in (fewer historical data) and zooming out (more historical data) will cause the volume profile to adjust, because the volume will change as more data comes in or goes out of the visible chart range. Once the indicator has been plotted on the chart, you can check this out by scrolling in and scrolling out your mouse when the pointer is on the chart. Also, each horizontal bar, by default, would comprise of up volume and down volume. Let us now look at a chart to get a feel of how the volume profile indicator looks like.
In the above daily chart, notice how the volume profile bars are displayed. Each bar, consisting of up volume (blue) and down volume (yellow), displays the total volume traded horizontally for that specific price level from the leftmost candle under display to the rightmost candle. The length of each bar indicates the quantum of volume that was traded for that specific price level. The larger the bar, the larger the volume traded for that specific price level, and vice versa. In the case of the chart above, see that larger bars were located near the center of the Y-axis, indicating that a bulk of activity occurred near the center. Meanwhile, see that the bars at the top, as well as those at the bottom, were quite small, indicating not much activity occurred at these price levels.
There are a few unique things to notice in a volume profile chart. Let us talk about them now.
- Value Area: Value area refers to the region or the price range within which a bulk of buying and selling activity took place. It is expressed as a percent and the default setting is 70. What does it mean when the value area is set to 70? Well, it means the chart will highlight that region where 70% of the total volume was registered over the area under display. And how is the value area highlighted? Well, it is highlighted using the transparency of the bar. To understand this, see the chart above. Observe that some volume bars are solid while the others are less transparent. The bars that are solid represent the region where 70% of the total volume occurred, for the area under display. That is, this is the region where a bulk of buying and selling occurred. This setting can be changed as per your liking.
- Value Area High and Low: The top-most bar within the value area is called value area high (VAH), while the bottom-most bar within the value area is called value area low (VAL).
- Point of Control: Point of Control (POC) represents the price on the chart that registered the highest volume, for the area under display. To understand this, look at the chart and notice the red horizontal line at 1996.25. This line is the POC, the price level that registered the highest volume. POC is automatically calculated by the indicator.
- Profile High and Low: The highest price for the chart area under display is called the profile high, while the lowest price for the chart area under display is called the profile low.
Let us summarize all this in a chart
2). Volume Profile settings
There are two tabs in the volume profile settings: Inputs and Style. Let us explore the Inputs tab first.
- Rows Layout: You have two options under this: Number of Rows and Ticks per Row. Number of rows allows a user to choose how many volume bars to display on the chart. Tick per row allows a user to choose the minimum number of ticks per volume bar. The default option is Number of Rows.
- Row Size: This is a sub-component of the above option. You need to input a number here. The default option is 24. As an example, if the Rows Layout chosen is the Number of Rows and the Row Size is set to 24, a total of 24 horizontal volume bars would be displayed on the chart.
- Volume: You have two options under this: Up/Down and Total. Choosing Up/Down would display both up volume as well as down volume, whereas choosing total would display only the total volume (up + down combined). The default option is Up/Down.
- Value Area Volume: You need to input a number here. The default option is 70. What this means is the chart will highlight that region where 70% of the total volume was registered over the area under display.
Let us now explore the Style tab.
- Show Values: Turning this on displays the value of the volume profile. By default, this option is not selected. Unless you want to see the value of up/down volume or total volume, this option is not needed.
- Width: This represents the width of each horizontal bar. You need to input a number here. The default option is 30. Increasing width beyond 30 would increase the horizontal size of each bar, and vice versa.
- Placement: This is an option for placement of the volume bars. The default option is Right, meaning the bars would appear to the right of the chart.
- Up Volume/Down Volume/Value Area Up/Value Area Down: Each of these options are for changing the colors of the volume bars.
- POC: Selecting this option would allow you to see the POC line. By default, this option is selected.
- Developing POC: Selecting this option would allow you to see how POC has evolved over time and over the chart area under display. By default, this option is not selected.
- Developing VA: Selecting this option would allow you to see how VAH and VAL have evolved over time and over the chart area under display. By default, this option is not selected.
3). How to use Volume Profile
One of the major uses of volume profile indicator is to identify price zones that are accepted (high volume zones) as well as those that are rejected (low volume zones) by market participants. These are regions of significance not only from a price standpoint but also from a volume standpoint. They can often act as important areas of support and resistance. Let us look at a real-time chart to understand how to use this indicator.
The chart above is the 15-minute chart of Nifty futures. There are a few minor tweaks that we have done to the indicator settings. These include shifting the horizontal bars from right to left and changing the colour of the up volume bar and the down volume bar to green and red, respectively. In the chart, see that Nifty is right at the top of the trading range. See that volume at this price level is quite low. Is it worth entering a long position here? Probably not, especially when looked at from a risk/reward standpoint. So, in case of a price correction, what could be a good level to enter a long position?
Well, one such area is the POC. However, as this is too far from the current price, let us ignore it for now and instead focus on the top of the value area, which lies near 15500 (shown using a dotted horizontal blue line). See that this area coincides with a previous low (blue arrow). If Nifty were to decline going forward, this region can be considered for entering a long position. Where can you place a stop loss for this trade? Well, if you look a little lower from the VAH, you will notice two horizontal bars with relatively low volumes. The bottom of these bars has been marked using a dotted horizontal purple line. See that this also coincides with a prior peak that is then followed by an upside gap. Hence, stop loss could be placed a few points below the purple line, that is below 15350.
The chart above is the 30-mins chart of ICICI bank. See that the stock is consolidating at a price region that has registered high volume (see the two horizontal bars marked in the chart using an arrow). Notice that the up volume and down volume are essentially identical over these two bars, suggesting a sort of equilibrium. If price were to break the red trend line, there could be a price correction. In such a case, one needs to monitor the price activity near the POC, as this could act as a strong support level. Now here is one suggestion: rather than focusing exactly on the POC, it would be better to focus on the area around the POC, as shown in the chart above using the purple rectangular box. If price holds near this support zone and bounces off it, it could be a good level to enter longs.
4). The time frames on which Volume Profile can be used
As we have seen over the last two charts, volume profile can be used on any time frame. It can be used on the daily and weekly time frame to gauge the larger picture and identify longer-term value areas, acceptance and rejection zones, support and resistance etc. On the other hand, it can also be used on intraday time frames to gauge the shorter-term picture and identify entry and exit levels. Volume profile indicator can also be used on the very short-term charts, such as the 1-minute or tick charts, to identify the price levels where key support and resistances lie.
In short, volume profile can be used by all types of traders - scalpers, day traders, swing traders, and positional traders. Also, just like any other technical parameter, get into the habit of using multiple time frames when analyzing using the volume profile indicator.
The above is the 1-minute chart of Bajaj Finserv. Notice how the POC of the previous session acted as a resistance to price in the next session.
5). Combining Volume Profile with other indicators
Before we conclude, an important thing to point out is that volume profile should not be used in isolation when making trading decisions. It should always be combined with other technical signals and the weight of the evidence approach must then be used to make a trading decision. You could think of combining the volume profile with the following:
- Candlestick patterns
- Fibonacci retracement and extension
- Technical indicators such as moving averages, Bollinger bands, and MACD
- Oscillators such as RSI and Stochastics, etc.
Let us understand this using a real-world example.
In the chart below, notice the region highlighted inside the red circle. See that there were a few confluences happening in this region, as mentioned below:
- Former resistance acting as a support (shown using the three blue arrows)
- MACD line touching the zero line and then rebounding off it rather than falling below it
- Emergence of a bullish belt hold candle (to the immediate right of the arrow)
- The POC of the volume profile indicator
- Price above the 100-hourly moving average
All these confluences suggested that a rebound could be on the cards. Accordingly, a long position could have been initiated here. What if this had failed? Well, had the confluence support failed to hold and had the price broken below the POC, a quick exit could have been made. One such point of exit could have been a tick or two below the moving average. This is how one can use the weight of the evidence approach when using the volume profile indicator.
Concluding our blog, volume profile is an invaluable and a unique indicator. Unlike the traditional volume indicator which provides volume per period rather than volume per price, volume profile provides access to volume at various price levels that are currently being displayed. This would help you precisely know at what levels important supports and resistances lie.
We hope that you will find the volume profile indicator beneficial and that it will help you in trading. We thank you for your patience and invaluable support. And stay tuned, we will continue adding more exciting features in the days ahead.
Stay safe and Happy Trading!
Disclaimer: Please note that the charts shown and explained in this blog are for educational purposes only.