Apr 222012

There are a wide number of techniques for (attempting to) predicting support and resistance or trend using volume profiles. The most basic of these approaches basically says to look for overnight changes in value (ie. where we open outside of the value area of the previous day).  When this occurs, we will look for some level of retracement back towards value and then continue in the direction of the initial revaluation at the open.

Another factor in this analysis is whether or not we open inside or outside the previous day's range. If you open outside, it is much stronger than just the above analysis. As a result, less of a retracement is expected and a "runner" market may occur.  This happens 2-3 days a month and days like this can make your whole month if you plan and manage trading correctly.

Big money trades this way and is quite aware of these levels on any given day.  I will be posting these levels each day on twitter so you can also practice this.

The levels and corresponding strategies above can be traded in a variety of ways. So, that being said, I will post current images of my volume profile below and then a more detailed analysis of the strategy in writing. Let me know if you have questions so we can help others in the answering of the questions..

Volume and Composite Profiles for 4/22/2012

Volume and Composite Profiles for 4/22/2012


Note the profile on the left. I have circled the value area in orange.  This area is bounded by 1382.75 and 1377.25; The value area high and value area low respectively. The yellow line is 1381.50. This level is the point of control.   The basic strategy written out is as follows:

For Monday, big money traders will be looking at the following:

1) If we open between 1382.75 and 1377.25, it is neutral. There are no reports Monday, so ranging will be likely.

2) If we open above this, look to buy in the area of 1382.75 to 1381.25.

3) If we open below it, look to sell between 1377.25 and 1381.50.

4) If we open above 1383 or below 1373 (Friday's high and low), then be cautions of a potential run in the direction of the gap.

Note also that we closed Friday below value. This is bearish, so we can also factor this into our analysis/judgement as to what is occurring.

Note also the dashed yellow lines. These are called virgin (untouched) points of control; areas that are very often tested later and that are key support and resistance levels.  So, if we broke higher to a higher valuation for example, we would want to exercise caution at the various virgin points of control above it. If this happened going down, there is more breathing room, or distance to the next likely support or resistance area.

The chart on the right is a composite chart going back to the 9th. We can see a number of things from this chart.  such as:

1) We are below the control point and have been for 3 days.

2) The last 3 days have sold off from the highs.

3) Friday we sold off from the point of control (high of day).

4) Most of the volume is up at the 1382.75 area (point of control/yellow line).  This is what I might call a magnet price area.

5) The biggest volume days have been down.

6) The volume on up days has been less than down days.

Note:  Markets tend to alternate between areas of high and low volume. So, you can analyze the profile in these terms. I will write about this composite volume profiling in another article. This is a very powerful technique for establishing support and resistance areas, particularly in a range bound market like we have now (on the charts).

I strongly believe you must make your own trading decisions, so you gather all the pertinent information and try to discern what the market wants and whether or not it is at some kind of fair value or not.  Also take note of the daily target levels on my twitter feed etc. and come up with a trading plan that has a reasonable risk profile.  I have discussed this elsewhere in this blog.


  4 Responses to “Volume Profile Analysis”

  1. A concise explanation…Thanks for keeping it simple.

  2. Thanks Bob :-)

  3. How do you define “the open” and “the day range” Are you only concerned about the NewYork market? What about London, Asia, etc…

  4. Hi Terry- We have traders trading the FDAX and the Hang Seng using our systems for example. Take a look at the Smart Patterns system at http://indicatorsmart.com

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