Before looking at Volume Profile, let’s first define what volume is. Volume is the measurement of a certain quantity traded during a specific period. Of course, this depends on the instrument in question.
For instance, we measure volume in stocks by the number of shares; in futures, we measure it by the number of contracts, etc. The aim is to determine the activity or liquidity levels during a set market period.
The higher the volume, the higher the number of traders at a particular time. This equals better liquidity and stable volatility. Meanwhile, the lower volume suggests fewer buyers and sellers. This means we’re dealing with a less liquid market, often resulting in erratic volatility.
In a nutshell, volume is about interest. So, where does Volume Profile trading fit in?
Volume Profile is a technical tool that shows the traded volume at specific price levels using histograms at the chart’s y-axis. The Volume Profile also measures the density of potential institutional orders around those price levels. It also helps determines which price levels are more likely for the price to see a reaction.
The bigger the histogram bar is, indicates more orders are concentrated around specific price levels, which are also usually around what we call Order Blocks.
That’s why the bars for the latter show horizontally rather than vertically.
In this way, traders can mark out the dominant key levels, which isn’t possible to identify with the regular volume indicator.
