Volume is the key on the market. In order to at least try to track efficiently bigger players on the market, this is a must have tool – especially in Intraday Trading. Today we will discuss one strategy, that without any subjectiveness – will help you define key levels on each market that contains real volume data. Those levels (especially groups of those levels) will work like a magnet and sooner or later – price will come back to retest them. The only question is – when will it happen.
Let’s start with basics. One of the most common tools based on Volume that brings significantly a lot of information to be used in trading is Volume Profile. Shortly speaking, it plots horizontally volume based on price levels. So instead of volume being drawn per each bar/candle (typical Volume Indicator), it changes dimension and plots it based on price instead of time dimension.
Above you can find example of Intraday Volume Profile. It may look complex for start, but with some time spent on using it believe me – you will quickly get expertise in using it. Value Area is marking zone where 70% of whole exchange trades happened. Its’ borders are called VAH (Value Area High) and VAL (Value Area Low). In Value Area, we also mark one level where most of the trades during day happened – it’s red line on chart marked as VPOC (Volume Point of Control). We treat this level as Balance Point, this is the most fair price that market created.
We also mark HVN (High Volume Node) and LVN (Low Volume Node) – first ones are also treated as Balance Points that’s why so many exchange happened on those levels. LVN are marking the biggest move that happened, we treat them as Imbalance Areas. This Imbalance between Supply and Demand is causing such significant moves.
We will talk more about Volume Profiles strategies later in other Blog Posts. Now let’s focus on strategy around VPOCs. First thing is to set up chart for one of longer time frames, like H1 or H4. Then we add Session Volume Profile (drawn per day). On Tradingview you also have option to “Extend POC to right”. What does it exactly mean? VPOC set from particular day (after end of the day) is expected to be retested the next day. This happen depending on the market and instrument we trade around 70% of the time. If you start think right now “Hey, it’s already a great strategy to play retest of yesterday’s VPOC at the beginning of new day” – yes, you’re right. It’s already significant statistical edge to be used.
On above image you can see Dax with added Volume Profiles. Also we extend VPOCs that were not tested next day. You can see some lines being very short, another ones significantly longer. And now remember one rule – longer the line, more significant it is! Those untested VPOCs (so our Virgin Points) are working like magnet for price – and sooner or later are revisited by price. It’s as simply as that! The only question (for which we don’t find answer) is – when will it happen.
How to play it?
By observing higher time frames with applied Volume Profiles, we can quickly check which levels were not tested by price yet. I try to use it as confirmation to my strategy instead of separate entry strategy. For example when I see signal for going Long (Demand Signals), I check whether there are any of Virgin VPOCs above – if they’re not too far from current price, they can work as great Take Profits points. Also in the same scenario, but having relatively near Virgins below current price, it is for me warning signal as price can retest first this level so I can be either careful with tight Stop Loss or wait for more optimal Entry place for my Long Trade.
Also another example can be potential grouping of multiple VPOCs. This happen very often for example on indexes (like Dax, S&P500 etc.) when those are making new Highs on chart. Such strong power of Demand is making almost impossible retest of yesterday’s VPOCs. Then having multiple VPOCs below current Index Price are working like a warning before potential reversal.