Weekend Study

Volume Profile / Week 4

#OrderFlow #ES_F $SPY #MES_F

There's quite a bit to cover here so we will keep it high level. Volume Profile is simply the volume traded at each price level and NOT by time. This allows us to gauge interest. WHERE the volume is being done is more important than WHEN.

Some things you'll want to learn about VP are the shape of the entire session (more on that later), high volume nodes (HVN's) and low volume nodes (LVN's) then ledges from those areas and finally TAPER.

Primary shapes we want to observe in VP are: B shaped, looks like small b.. this indicates liquidation break and then accumulation from longer timeframe players or more patient longs.

Essentially market sold then found someone will to absorb the rest of selling thus putting a low on the current session.

Next primary type of profile is the P shape, this is indicates a short covering rally, market rallied to a point and did not extend or find new buyers to continue the move higher. Usually a sign of weakness in market.

The last type primary type would be trend or multi node (multiple high volume areas). This indicates strength in the move in either direction. Market made a move, paused, continued the move, paused, then continued.

So now we know 3 basic types of profiles and what they indicate we can gather some information from previous sessions and develop context. Did we have have short covering the past few days (weak) , accumulation (strong) or trend.

Take a look at the picture below and see if you can develop a "story".

Now you have some context. Time to spot some areas of interest? I focus on LVN (low volume nodes), they are areas of rejection from either buyers or sellers. We quickly traded through that area so now the initiative side wants to keep control by protecting that area.

In LVNs if we are coming from above and we pullback into an LVN that is an area buyers want to protect.
Can you pick out the LVN areas here? You can see how thin the profile is below, so bulls have some work to continue they need to continue to press above the high volume node.

I like to trade from LVN and target the next HVN, simply because I expect for LVN to quickly reject and use HVN as a magnet, price gets pulled to the HVN from the LVN. HVNs develop because of acceptance of prices, so we want to trade FROM rejection areas TO acceptance areas.

You can pull these areas of LVN from longer timeframes like 30 day composite, or 15 day composite. There's really no magic to it, identify the most prominent areas and mark them, then during the day you can see the developing LVN areas.

Taper is the last topic, essentially taper is what you look for at highs or low of the day, does volume (interest) taper off. There's basically less and less interest at each price level creating a nice tapered look.

For prices to extend we want to see volume continuing to build in the direction we are trading. Any taper would give me pause, either closing positions or trading against it.

One more area you would want to understand is the concept of value and out of value, since the market is always trying to auction to "value" where buyers and sellers are interacting, we can calculate this by calculating where 70% of the volume was done.

This is called the value area. The bottom of that value area is called the value area low, and the top is the value area hi. Inside value is the most accepted prices and outside of value is considered unfair or out of value.

There are strategies to trade in and out of value areas, but I'm not going to cover them since we are already 19 tweets deep :). Maybe another time.

So spend some time learning about the shape previous VPs, then HVN,LVN areas and finally the value areas and of course VPOC which is simply the most traded volume of that session (black on my chart).

I tried to incorporate many of the questions asked yesterday into this thread but if I didn't cover anything just ask!

Twitter seriously needs an edit button.