I’m only interested in trading at areas I’ve identified in advance as interesting. These areas and the presence (or absence) of volume and the way in which trade occurs in those areas (i.e. price action) is what I use to make decisions about whether to trade big or small, whether to trade for small or large targets, and whether to trade at all.
Volume (Volume at time):
Volume at time is the more common type of volume that most traders might use and it’s indicated by histogram usually at the bottom of the screen on the y-axis. So if you’re using a 5 min. chart for example, you will see a histogram with a volume bar that’s associated with any one of the 5 min. bars that occurred during the day.
Price-based indicators are all just derivatives of price, but volume is actually different information. One of the most important things I want to know is how much volume traded at a given area the last time price was there. Abnormally high or low volume is often very telling and provides clues into how traders might react the next time the market trades there. As an example, volume spikes into key areas of support or resistance are always places that I’m interested in doing business. That said, the bigger picture is always critical to be aware of as well. Context is king, and depending on that bigger picture, I might spot a setup that looks exactly the same on the intraday chart as the one that I bought yesterday, but if today’s context is different, I might pass on the trade or I might double my buy size.
Volume Profile (VP) (Volume at Price):
Over the years, with all the various indicators that I’ve tried, I was always most interested in volume-based indicators. The problem that I found is that indicators are lagging or are just a matter of past data averaged out to give us some type of a line or histogram that is supposed to help indicate the possible direction that the market is headed in the near future. In more recent years, software packages have become available with volume profiling or market profiles that allow us to visualize volume at individual price levels, and to me that is the most important thing. I’m especially interested in the areas of extreme volume, either high or low. It’s in these areas that I try to get an edge that can help me make a trade decision. You can approximate volume-at-price information the old-fashioned way, by eye, and it’s still quite effective, but the improvement of the technology to automate this is a major convenience.
I use Volume Profiles to help me identify areas of support and resistance or supply and demand. Some of the things I look for are a profile’s VPOC (NVPOC), as well as noteworthy LVNs, and HVNs.
VPOC= Volume point of control. This is the area or level that has the most volume for that period profiled. (I use the term POC and VPOC interchangeably.)
NVPOC= naked volume point of control. This is the area or level that has the most volume for that period profiled and has not yet been tested by price since its formation. (I use the term NPOC and NVPOC interchangeably.)
LVN= low volume node. This is an area or level that has very little volume for that period Profiled.
HVN= high volume node. This is an area or level that has a good deal of volume for that period profiled.
(we will insert Charts with examples of each)
What these areas mean to me and how I use them to trade are open for interpretation by the individual trader and/or may vary depending on price action for that day or week or month etc. The POC and or HVN represent areas of active interest to other traders. We know this is true because a lot of volume has traded there in the past, so by definition, there was a lot of buying and selling. If a lot of traders had an interest in buying and selling in an area then why wouldn’t I be interested in possibly doing business in this area? Conversely, LVN areas represent areas where many traders did not seem to have much interest in doing business at all. So, as price approaches the HVN & LVN areas I prepare myself by focusing in on the price action (speed of market, depth of market (D0M), time and sales etc.) to determine or to help determine if I am interested in taking a trade at a particular level in this area.
Zones are areas of interest — predetermined by me — or levels of support and resistance/supply and demand based primarily on past price action (POC, NPOC, HVN, LVN etc.) and confluence in and around these areas. The way I get my zones is to take the areas of confluence and sort of grade them as major or minor. The way in which price approaches these zones and/or the way in which price reacts at these zones helps me determine possible trade entries and/or trade management.