Using the Volume Profile in Crypto

Introduction to the Volume Profile

The volume profile is an extremely powerful tool that traders can use to help take their strategies to the next level. 
It is extremely versatile and can be used for a wide variety of things, including finding areas of supports and resistances, as well as finding areas where we can expect rapid price movements.

The Volume Profile in it self is a indicator that displays the trading activity over a specific time period at certain price levels. Meaning, it shows what was bought and sold at those current levels, and displays them in a histogram on the side of your chart.

Example Chart

When you first pull up the volume profile in trading view you'll notice three options: Fixed Range, Session Volume, Visible Range.

I would recommend using the visible range as it is the easiest to use as it doesn't require setting up any fixes points before hand. The rest of the tutorial will be using the Visual Range, and will be referred as the VPVR. (Volume Profile Visible Range.)

When you pull up the VPVR for the first time on trading view, by right clicking, then hit ‘insert indicator’, and selecting Volume Profile Visible Range. You'll notice some lines on your screen as well as the Volume Profile. IMO these aren’t nearly as important as the VPVR itself and you can go ahead and disable them by either double clicking the VPVR itself, or clicking the settings for VPVR and under style un-checking the three boxes for POC, Developing POC, and developing VA. If you want to use these for your trading you’re more than welcome to, but I do not. -

If youre interested in what these things are read below, if not you can just skip.

Point of Control (POC) — The price level for the time people with the highest traded volume. *
Developing POC — The price level for the time period with the highest traded volume. This changes multiple times per period and when the time period is done it becomes the POC. 
Value Area (VA) — The range of price levels in which a specified percentage of all volume was traded during the time period. 
* = I do sometimes use the POC to find interesting price levels that the market wants but do not typically.

Identifying areas of Supports and Resistance With VPVR

This is one of the most powerful tools that the VPVR shows you. The ability to identify and use these price levels is extremely powerful, and in my opinion too many people rely on indicators like RSI, StochRSI, Macd, and others. They don’t understand the importance of supports and resistances, and how profitable it can make you. While using these can help, these indicators can be incredibly misleading and lead to believe that something is going to reverse / continue when it will not.

Shown above you can see areas where the VPVR has a high volume node (HVN), or sticks out compared to the rest of the VPVR. Trades can use these high volume areas to identify supports if the price is dropping into them, or resistance if the price is rising into them. When the price approaches these levels, we can expect some consolidation, and we also know that the price is less likely to immediately break through that price range.

HVNs are areas with typically much higher liquidity, and much more orders than LVNs. This is why we see the price have a much harder time breaking these price levels.

Here is an example of using the VPVR on the 1HR BTC chart.

Looking at the VPVR we would have seen the high activity level, and known that we can expect resistance / support here depending on which way we approach it. As we approached this VPVR we consolidated, and experienced sideways action in the market. 
Combining these VPVR levels with horizontals is incredibly powerful, as you can see here with just one line and using the VPVR, we could have had 2 successful shorts, and a long after the breakout and retest.

Another example here of using the VPVR as a tool to identify trades. Was on the recent rise to 11700.

Ahead of time we would have seen the high volume node at the 11400–11700 range, and known that we will more than likely see some resistance as we approach these price levels. Again, combing the VPVR with horizontal supports and resistances is the optimal way to use it. Do not just rely on the VP.

The example above is why you cannot put too much trust into one source of information. The VPVR didn't show a high activity area at the 9300 range. However, our horizontal support, and if we would have used we would have been able to identify that reversal point.

You can also use the VPVR with Fibs, areas where fibs, horizontals, and VPVR all combine provide even more confidence in the level.

You can also use the VPVR to show how strong a support / resistance is. As the price hits a horizontal / fib and consolidates in that area. We are looking for the VPVR to form a HVN to signal confidence in that price range and let us know that the price level is much more likely to be held as support or resistance. Here are some examples.

This was a chart of ETH as it found a short term support at around 770$. Notice how even though we seem to have found support at that range, the VPVR show realitvely low trading activity. This can tell us that the market doesnt think this is a support, and that we can expect it to break down.

And as predicted it does. 
You can use the VPVR to show much the market reacts to your support, when attempting to catch the price, if you were to enter a long at the support and noticed that the VPVR wasn't showing much at that level you should then look to get out of that long as quickly as possible, or sell your position as you know that the price is likely to break that level. The more the market reacts to a certain price range, will be reflected in the VPVR, you are looking for strong reactions to give you confidence in your supports / resistances.

Using Low Volume Nodes (LVN) to identify breakouts, and areas of rapid price movement.

LVNs are areas where the VPVR shows small amounts of trading activity. 
This is typically shown by a very thin VPVR, where the actual bars will be noticebly smaller than the bars above and below.

This an exmple of a LVN that BTC is quickly approaching, this LVN typically happen after a HVN, as we can see it does here as well. 
We can expect a low amount of orders in this price range, and low liquidity as a result, causing the price to rapidly increase in this level. 
This can also be a bearish scenario as we can see below.

This is a picture of the BTC chart during its recent 70% drop in Jan. 
As you can see on the 14th of that month, we were currently consolidating in the HVN of that price level. Below that we had a gap in the VPVR, or a Low Volume node. Because we know that upon entering a LVN we can expect rapid price movements, we could have expected the price to quickly drop through that range, and land at the next HVN.

Which is exactly what happened. 
The followed these rules and quickly cut through the 10ks down to the next HVN at the sub 8k range. We then could expect the price to react to this area, and it did. Consolidating for a while, before entering the LVN from the opposite side and have a rapid increase back up to the previous 10k HVN. 
Using LVNs for breakout trading can be extremely profitable if done in a correct manner.

This is another example of using a LVN for breakout trading. Before we enter the trade, we must identify the areas of high trade volume and low trade volume. 
Once we have identify that we then let the market come to us, remembering to patient and letting the market play out and reacting to it would have been very profitable as shown here.

Following the VPVR rules, we would have been able to short the price upon breaking of the horizontal / HVN area of the VPVR. 
And targeted the nearest HVN. Which was exactly what happened.

The last thing I want to discuss about LVNs is that price tends to ‘fill’ these areas in. Meaning that the more we cut through them the more orders we can expect to fill up that range, and be reflected in the VPVR

Summary / TL;DR

  1. The Volume Profile is a histogram of the amounts bought and sold at specific price levels.
  2. Using Areas of HVN ( High Volume Nodes, or areas where bars stick out ) We can identify areas of support / resistance, and areas where the price will have a hard time just passing through.
  3. Do not rely soley on the VPVR. Combine it with Horizontals, and Fibs to find areas where they overlap. The more these tools overlap the more confidence you can have in the market reacting to that price level.
  4. If a support / resistance is forming it will be refelected by the VPVR. If a support has been formed, and the VPVR shows low amounts traded in that level, we can expect that price level to break down. The same with resistances, if we hit a resistance and have low amounts traded in that level, we can expect that resistance to break down, and the uptrend to continue.
  5. Identifying LVN (Low Volume Nodes, or areas where the VPVR shows little amounts traded) can tell us to expect low liquidity and therefor we can expect rapid price movements in that area.
  6. Price tends to fill out these LVNs so over time we can expect more trading, more orders, and more liquidity in those areas as we continually cut through them.

If you have any questions about the VPVR, send me a DM on twitter or tweet @ me.