Transcription
Most retail traders blame the wrong thing when they blow up an account. They blame the strategy. They blame the broker. Most of them blame themselves for not having enough discipline. And after 30 plus years in these markets, I can tell you that most of the time, none of these things are the actual problem.
The problem is far more simple and a lot harder to fix. They're reading a map that does not show the terrain. Think about what most retail traders are watching. They're watching price. They're watching a moving average, maybe a MACD, an RSI, or some combination of signals that all share one critical flaw. They are all built from price. Price in, signal out. And if there's one thing that can be manipulated in this market, it's price. Every single one of those signals can be manipulated and often is pointed in the wrong direction at exactly the wrong time.
And I learned this the hard way. Not from a book, not from a course, not from a seminar, but from sitting at my desk watching positions go against me in ways that the chart should have not allowed. And eventually I stopped asking why my signals failed. And I started asking a different question. Where did the actual money move?
When I started in this business, the standard tool at every desk was a level two screen. Some of you might know futures depth of market. You watch the order book. You watch where the liquidity was. You watched the market makers. You saw orders stacking up where it was thin. It wasn't perfect, but it was honest. What you saw was reasonably close to what was actually happening.
Then somewhere around a decade into my career, algorithms started accounting for a lot more, a lot more than about half of daily trading volume. And that level two screen, well, it stopped being so honest. Algorithms add liquidity and pull it in fractions of a second. What looked like a deep bid could disappear before you could even fill it. That honest book became a distraction. It was no longer true.
I spent almost two years figuring out what to do about that. Two years of studying everything I could find on volume analysis. Not volume bars, not on balance volume. I'm talking about where volume occurred at a specific price level over time. Which prices were attracted to the most transactional activity? In other words, where was the participation really happening? Which prices almost nothing traded through. That's when volume profile became the center of my entire approach and it's been there ever since.
All right. So, what's volume profile? It is not a prediction tool. That's the first thing I want you to take off the table completely. It does not tell you what price is going to do. It tells you where real transactions already occurred and in what quantity. One thing I noticed over and over again with newer traders is that they wanted a tool that predicts. They want something that fires a signal and they follow it blindly. Volume profile does not work like that. It's a map. The map shows you the terrain. You still have to decide how to cross it.
So, here's what it actually shows you. For any time period you choose, it displays how much volume traded at every single price increment. The horizontal bars extend to the right of price. So, if you ever looked at volume profile, it sits along the right edge of the chart and the histograms come out sideways. So, you can see how much volume happened at each price level. A long bar on volume profile means a lot of volume traded there. A short bar means very little traded there.
The price level where the most volume traded in any given session is called the point of control. That is where the market spent the most time doing business. It's attention. It's participation and it's your anchor. There are areas within the volume profile where volume clusters heavily. Those are known as high volume nodes or HVNs. And there are areas where volume drops off sharply. Those are low volume nodes or LVNs.
Here's why that matters. Price does not move through high volume the way it moves through low volume. High volume zones tend to act like gravity, a gravitational pull. Price gets pulled back to them. Price stalls at them. They attract activity. Low volume zones are the opposite. When price enters a low volume zone, there's almost nothing there to slow it down. That's where you see fast vertical moves. And if you're on the wrong side of one of those moves without understanding what caused it, you're going to think the market is hunting your stop. Sometimes it is, but sometimes, most of the time, it's just physics 101. No liquidity, no friction, fast move.
The shape of volume profile distribution tells a story. And once you learn to read it, you stop guessing about who controlled the session. A normal balance distribution looks roughly like a bell curve. Price spent most of the time in the middle range with thinner volume at the extremes. That tells you buyers and sellers were in rough agreement. Nobody dominated and the session was neutral. That distribution is elongated towards the highs with the bulk of the volume near the top telling you where the buyers were aggressive. Price moved up into discovery in search of sellers liquidity. It closed near highs. buyers won the auction. The distribution that is elongated towards the lows is the mirror image. Sellers drove prices down. They were looking for buyers willing to step in at lower prices.
Now, remember as I'm explaining these, there's no such thing as a buy without a sell. There's no such thing as a sell without a buy. The market is a matching mechanism. The profile tells you where they found the match.
Now, the value area setting is something I want to address directly because I see traders use the wrong setting constantly. Most charting platforms default to 70% and that means the value area range is where 70% of the days volume traded is going to cover a massive portion of the profile. And that's fine. 70% is fine. It's an industry standard. But in my experience, that's too wide to be useful for an intraday context. Try using a 40%. I arrived at that number years ago when I was working with newer traders who struggled to read distributions the way I did. I had been doing this for so long that my eye automatically filtered what mattered. I dropped the value area to 40%. Now try it. Compare the 40 to the 70. Just don't take my word for it. See the difference on your chart.
So when I dropped the value area to 40%, something clicked for them. The structure became cleaner. The high probability zones became more obvious. So again, try them both because if you're new to this, 40% is where I would start, but compare it to the 70.
There are two distribution shapes I want to call out specifically because they come up in trading conversations almost more than anything else. A topheavy distribution forms when price rallies through a low volume zone early in the session and then closes back inside near the highs. The move was real, but it did not hold. That is a potential reversal signal especially when you have additional context like trend or economic events supporting it. A bottomheavy distribution is the same. It's the same pattern in the opposite direction. Price sold off through a low volume zone and then closed inside the value area near the lows. Think of that as support. Again, a potential reversal, but only with the context.
Often times you'll see liquidity sweeps here. If the trend is behind it and it's still strong, I'm not looking to fade it. Fading a strong trend early is one of the most expensive habits a trader can develop. It's a huge mistake and it's a hard one to break.
I've watched traders manage positions into high volume nodes and get confused when their trade stalls. They think their setup failed. Most of the time, the setup did work exactly as it should. Price did what it does near high volume nodes. It gravitated there and then slowed down. Think of it as a ceiling. High volume nodes make excellent profit levels. If you have a position running and you notice price is approaching a dense volume cluster and that is where, think of it this way, beyond that high volume node, who's willing to be a buyer above it? That's where the volume drops and you have fewer participants, less follow through. And that is your signal to start thinking about your exit or at least scaling out but not your entry.
And what about low volume nodes? Those are where new traders consistently get hurt. You see a setup, you get in, and then price absolutely rockets through your level that you expected to hold. Once that volume cluster was broken, there was nothing, no support, no participation to keep price supported. You check the chart afterwards and you realize you entered right at the edge of a major low volume node. There was no support there. There was never going to be.
So we think about participation. Remember as I say volume, it's easy to make this sound like something that is not human psychology. Volume. Every time I say that, think participation and think attention. No trade succeeds without participation. No one is a winner alone. Follow through needs attention and attention is what then becomes participation.
So, one habit I developed early and have kept ever since is marking significant high volume and low volume nodes on whatever time frame that I'm trading. If it's a daily chart, if it's a weekly chart, if it's a five minute chart, and I'll do that before I start trading. Now, if you're a short-term trader, and I don't pigeon hole myself into short-term day trading and swing trading and long-term trading only. I do all of them. But if you are a short-term trader, I'm not necessarily looking for setups at those levels. But when I'm managing open positions and price is suddenly moving faster than expected, it looks like nothing's in the way, the first thing I check is whether or not I broken into this low volume node. And if it did, I know that there's less pressure on price to prevent it from running higher, and I'll let it run longer. A great time to see this is after new highs in the market. There might be a high volume node that may have then been broken and there's very little in the way to higher highs. If I see a high volume node ahead, that's when I start to tighten up. It could be scaling out and moving to break even. If it's a second target, I'll scale out and move my stop to the first target. My thought is pay myself when I can, not when I have to. Most traders wait for price to start sinking against them quickly and they panic and scale out. Use that volume just like institutions would to get your fill. That one adjustment and how I use these profiles for trade management has made more of a difference in my results than just about any other change that I've made to my entry and trade management criteria.
All right, this is one of the cleaner setups you can build into your playbook. and it's one that retail traders consistently miss because they're watching the wrong thing at the wrong time. Here's what happens. Price has a strong directional move in one session. Maybe buyers pushed hard and the profile closed well above the value. Maybe sellers took control and closed below it. Either way, there was a clear winner, the bulls or the bears. The next session, price starts to retrace. It pulls back towards the prior session's value area. It looks like a sweep or it looks like a failed breakdown or breakout. Retail traders look at a retracement and think one of two things. Either it's a pullback and they should add to their position in the direction of the original move. So they short, it goes up and they think they should short some more or they think the move is done and they get flat. And frankly, neither of those reactions is reading what is actually happening.
What's actually happening is price is returning to the scene of the transaction, the prior value areas where the institutions transacted in volume. When price comes back to that zone, you're watching a retest of that institutional activity. Remember, institutions just don't enter all of their position over one session. It might be over multiple sessions. So revisiting that area becomes a logical place for them to continue to fill or buy the things that they were wanting to buy. That therefore is a high probability area for support or resistance. I remember watching traders blow out of perfectly good setups because price retrace further than they expected and then they panicked. But the profile was telling them exactly where the retest zone was. If they had known to look, they would have held or even added if they're scaling in because price re-entered the entry zone instead of bailing right before the move resumed.
The setup is not complicated. You identify the prior session's value area. You wait for price to retrace into it. You look for a trigger. Could be a candle break. It could be a candle pattern. It could be maybe a a Darvis inside the zone. If it's a trend, I look for my 34 EMA wave. you could see a structure shift. Whatever your entry method is, these volume profiles in and of themselves can supplement whatever you're doing now. In fact, that's how I recommend using it. So, whatever entry method fits your current style. You place your stop outside the zone and you target the move back in the direction of the original auction. What you're betting on is that the same institutions that drove price away from that value area the first time are still waiting there for the retest. You will never know for certain that they're there. Trading is not about certainty. It's about probability. Nobody in trading ever has a complete understanding of everything everyone's thinking. But the probability is on your side when the structure supports it.
If the retracement is a setup for patient traders, the rollover is a setup for traders who want to catch the turn earlier and are willing to work for the entry. Here's what I look for. In the first half of a session, price moves in one direction, not necessarily explosively, just directionally stairstepping. And then in the second half of the session, price begins to consolidate. Value forms near the extreme of that move. When the value forms at the high of the session and the profile starts to look like it's going to roll over, that tells you that the aggressive side of the market is running out of steam. The buyers who drove price up do not have enough follow-through to push it into discovery above that value. Price is stuck. That is your signals to start watching for the sweep for the reversal trigger. Maybe a minor high, maybe an inside candle. That rollover gives you an earlier entry than the retracement setup. That means better riskreward if you can wait and then wait for the read. It also means you need more patience to wait for structure to form before getting in. And you need to be honest with yourself about whether you were seeing a rollover or just a pause inside a strong trend. Those look similar early on and they resolve very differently.
One thing I'll always come back to, if the trend is strong, let it term before you look for a reversal. And I don't actually like reversals at all. If there's a strong trend and I pull back to it, a retracement, then I'll just look for the continuation. A mentor of mine once told me that fading a trend is like standing in front of a train expecting it to stop just for me. The train does not know I am even there. Wait for it to slow down first. Wait for a structure change. Wait for resistance if you're looking to fade strength. Wait for the choppy market structure to give you an overbought resistance zone. That image of the train has definitely stuck with me.
I've traded rollovers for years. The R multiples on clean ones are generally exceptional. One, two, three patterns, inside candles in chop, a overbought stochcastic at a ceiling. These are very useful tools. The entry is earlier, which means a tighter stop. I'm trading right at the edge of where the node is, and it means more room for profit on the side of the move. But the ones that are not clean will take you out quickly if you're not careful about where your stop is relative to the value area structure. Think of it this way. If price is able to get beyond a level, often times momentum traders will jump in or sometimes you'll have buy stops waiting above a ceiling. And that is why one of my mentors also said the market moves in the direction of the most stops.
After everything we covered today, I want you to sit with one idea. Volume profile is not a new indicator. It's not a shortcut. It's a different way of understanding what the market is actually doing beneath the surface of price. When you start reading distributions instead of just price patterns, something shifts. And by the way, you can put those together. I love looking at patterns like a minor high or minor low, inside candles, fair value gaps that sync up with some of these distributions. You stop asking what the indicator says and you start asking why price is at this level. who put it there and what is likely to happen when it gets there again. That shift in how you think about the market is worth more than any setup I could walk you through. The setups are tools. They're signals. The shift is the foundation. The shift is the trigger.
Start simple. Pull up a volume profile on a 1 hour chart or a 4 hour chart or a five minute chart, whatever you like. Look at yesterday's session. Identify the value area. Trading View is great for this. Go into replay mode. Mark the high volume nodes. Make sure you use visible range volume profile and trading view. I love that one. It'll highlight the point of control and you can see the value area high and low automatically. So you can mark these nodes yourself or just do it automatically with Trading View and then ask yourself what the distribution is telling you about who controlled that session. Do that every day for a few weeks. Utilize that replay. It's like having history you can study and then going forward, you know, the history may not repeat itself, but it sure does rhyme. And I can't promise you immediate success in anything, but I can promise you that your chart reading will look different.
I'm curious whether you're already using volume profile now or if this is completely new territory for you. So, drop a comment below and if you have a specific challenge with reading distributions or identifying which setup fits a given context, let me know. That feedback will shape for sure what I'll cover next.