The most Consistently Profitable Set-up using Volume Profile
Welcome back to those of you who read my first article on Order Flow Analysis from a few weeks ago (and hello to the first-time readers). This is the second chapter, as promised, which dives a bit deeper into the thought process of profile traders when high-probability set-ups present themselves. As any experienced trader will tell you, most of trading is sitting on your hands waiting for set-ups that are, probability-wise, likely to be winners based on statistical analysis. What does this mean?
As I began to explain in the first article which went over distribution curves, and how to read the underlying symmetry, all markets at the end of the day, are auctions with buyers and sellers competing against each other for control. We went over the “POC” (point of control), “HVN” (high volume nodes) and “LVN” (low volume nodes) a bit and I alluded to these areas being very important.
If you are not familiar with these terms, please go back and read the first article to be brought up to speed.
When using low-volume areas of the profile to enter into your positions, you increase your odds of finding local tops and bottoms quite a bit. This is because LVN areas are often gapped through (skipped) by larger size during price discovery. They tend to be revisited less often than the HVN areas like the POC. HVN areas tend to offer support and resistance, as they are typically the most frequented ticks on the chart intraday (the most commonly accepted prices). LVN areas, by contrast, are the exact opposite, and as stated were likely gapped through by large traders during the auction process, due to various reasons.
The key is to not jump at the first opportunity that presents itself and wait for the low-volume areas to be revisited while keeping your risk tight on those entries. This is why most profitable traders will tell you, trading is a lot like fishing. You sit on the boat for hours on end sometimes, just waiting for a nibble. Sometimes the nibble doesn’t lead to anything but your bait being taken (which is akin to being stopped out), but if patient enough, eventually you land the monster you were seeking. It is quite a cliche, I know, but it’s the truth.
Most novice traders give themselves death by 1,000 paper-cuts. This is usually from overtrading and entering into positions they could have waited on for better R:R (risk:reward), or by having loose risk management & stop-loss placement usually. This is why I keep repeating that the way to consistent success is to identify what works, build around it, quantify your risk and sit on your hands. Statistically speaking, the areas surrounding the LVN part of the profile haven’t been explored, chances are price will revisit and test for support/resistance. It’s usually a good entry point as well, provided you have your risk well defined.
In the example below, we can clearly identify an LVN cluster on Cignals via the real-time histogram. You’ll notice, around $44,000 Bitcoin finds a low volume cluster and begins to react upward immediately to the tune of roughly $4,000 a coin, and then goes on to print fresh ATH’s. Check out those gray horizontal lines that were left behind during the price discovery in the initial $44,000 region as well. These lines represent major differentials in buyers vs sellers during the auction process. We call these areas “unfinished auctions” and they tend to act as magnets for price (ie: support and resistance) and very often line up with your classical TA based on composite charting.
You can also see little lines on the cluster bars, which represent buy/sell imbalances. These imbalances serve as clues to how machines/larger size trades at any given level (there will be a subsequent article that goes deeper into this and UFA). Lastly, there is a configurable volume indicator at the lower end of your console. You can see there was a slight volume spike when we hit the LVN area around $44,000 and it was mostly buy orders lifting the ask up and running into little resistance. The one big sell order when we came back down to retest $44,00 (which was defended around $45,000) was absorbed, printing a UFA and strengthening the mid $40k’s as strong support for the (my opinion) nascent bull market we are experiencing in Bitcoin.
Now that you know about the fundamental rules of being patient, developing a solid RM strategy, and identifying areas of the profile that are likely to favor an entry (remember this can be used either long or short — this example is clearly a long entry setup), what do we do once we are in the position? This is the end result of the LVN entry at $44,000 which is a fresh ATH @ $49.5k+ and a local top-placed @ $49.1k. Notice the UFA and subsequent LVN cluster at ATH: the new POC has rotated to the $47–48k range, which would have been a very solid exit point for this scalp. You always want to be entering into low volume and exiting into high volume (ie: LVN entries, HVN exits).
To illustrate the flexibility of this strategy, notice how a big sell imbalance is sitting right @ ATH. Then, as price moves down into HVN support, a new local top is formed at $49.1k, right in the upper end of the distribution curve where you’d expect to see more LVN’s. A betting man could argue that with low volume as we’ve seen over the weekend, sometime before Asia comes back online for the new week, & some confluence around the LVN area we could see a slight dip back into HVN/POC. Which we saw with the local top creation and ~$1k dip after.
This system works well and is time-tested in traditional markets such as futures & stocks. Cignals offers this all to you for free, and moreover, is the only company in the crypto space that has this caliber of technology available, bar none. We pioneered the processes of efficiently tracking the immense data that goes into accurately digesting all of this information and displaying it in real-time for you.
In the next article, I will cover all of the advanced features of Cignals that I’ve alluded to in this article. It will cover how to use them in conjunction with classical TA (composite), and advanced order flow analysis. All of what we’ve learned here in the past two articles will tie together, and show you how to adapt to any market and condition you’re faced with!
