How To Use Volume Profiling And How I Trade For A Living

Nearly 7 years ago I started trading and the core reason I’ve been able to “make the turn” and do this as a full-time job is that I was introduced to a strategy called Volume Profiling.  Volume Profile Trading has helped me gain independence and stability and I want to show you all what you can achieve when you completely understand it.

Talking about it and explaining it is a really big topic and it wouldn’t be fair to that concept to say that I will teach you everything there is to Volume Profile in just a single article or video. However, I will quickly give you a lot of practical steps and actions that you can use immediately in your trading life.

How I Found Volume Profile?

If you are a trader that doesn’t have a system, if you’re not consistent and if you don’t have an approach on how you trade then you don’t know what you are doing, you will be lost and a lot of things will not make sense. Even if you see a YouTube video explaining a trading system and it works for them, don’t be fooled because that person might have handpicked the scenario where that trade makes sense and leave out the explanation.

What will happen next is that you might find yourself in a position that you apply that strategy but it doesn’t go like it was supposed to. That’s because you need to understand the strategy first then use it in trading. You might get discouraged and after some time try another strategy. However, there were some instances where a trading strategy worked and it got me some profits but at the back of my head I didn’t understand completely why it happened. Buying and selling when a line tells you without understanding the logic behind it were not sustainable and wrong.

This was my journal as well until I found volume profile trading and I’m sure many of you have gone a similar route as well. At least I’m glad that your journey has led you here since I will explain everything you need to know before committing to a trading strategy. When I learned about Volume Profile everything felt like it made sense and something clicked inside of my head.

What is the Volume Profile?

The Volume Profile is not like a magic bullet which once you find it everything’s going to be perfect. You still have to understand it, build a skill level, and develop it. It’s not a straight path it has its ups and downs but I pulled through and made it work really well, the secret is not to quit and not to get discouraged. My routine has been the same now and 2 years ago when I made it.

Volume Profile is simply displaying at every single price how much buying and selling occurred. It’s showing you the volume when we have a buyer and a seller that come together do business, when the buying and selling happens we call that volume. That is important because if you understand the only reason that we have exchanges, the only reason that we have financial markets is that we are trying to match together buyers and sellers.

In its most simplistic sense, a volume profile is a histogram that’s been turned on its side and it’s showing you at every single price where the buying and the selling are happening. This can be an intraday volume profile which can be really useful or there’s another technique where you clump up some profiles together. If you want to use the same charts that I do, which are the Sierra Charts then here’s the link where you can download it, and then it’s a simple matter of importing the file. The imported charts should look something like this in the picture down below.

Understanding the Volume Profile

Okay first of you can see the top of the profile and the low, which represent the high and the low of that price. On every volume profile, there are 2 colors and as you can see on my configuration we have the grey area and the blue area. What grey represents is that there is where roughly 70% of all the trades are happening, and for the blue parts there’s where the other 30% has taken place.

There’s a thick pink line that is present on all the profiles as you can see from the picture above and it’s called the point of control or POC. What it tells us is which is the most popular price where the most buys and sell happen. As you may have noticed there’s also a thin line going through all the profiles and is known as the V WHAP or Volume Weighted Average Price. This tells us what’s the average price of the entire buying and selling is on any given time or profile setting.

How to Use the Volume Profile for Mean Reversion Type Trading

Okay so first of all let’s look at the picture and try to understand what I explained before. For this example, I’m taking crude oil and I will explain everything step by step so read carefully.

What we are trying to do here is to look to play the extremes of this profile back to the middle but back to the other end of the extreme, so we’re looking to play the value area. Let’s look back at the opening of the market, within the first minutes there we can immediately spot an opening day high (O.R High) and an opening day low (O.R Low) and we can understand what type of day this is going to be. Illustrated by the picture below.

As you can see we go on to violate the opening day high and low pretty quickly so that means that we shouldn’t expect a trend today. And I shouldn’t even say that because there is no should or shouldn’t in the market since it will always do its thing but what I mean is that generally shouldn’t be a trend. What we can do to win here is to search for the mean reversion and play the extremes.

When there is a huge sell and the price is on the extreme low we need to wait until the price is on the value which in this graph is represented by the grey area and then go in. We then have to hold and wait for the price to go to the other side of the value block and then try to find the same thing all over again but in reverse. Let’s look at the picture below to understand it better.

Okay, so what we need to do next is to wait for the price to come in the value zone and then purchase. You have to be patient with this step since it’s really important and you have to buy at the first moment the price comes to the value zone which for this example is somewhere near 62.33. Now let’s fast forward this day and look at the trading results at a later time on the same day.

As we predicted the price did indeed go to the other side of the value block and that’s where you should have sold and made a profit. Now you can flip the script if you want and do the same in reverse. This is a really great way to trade and it can bring you a lot of profits but don’t run half-cocked with this information because it’s not as simple as buying the low of a volume profile and selling the high. The first hour of the day, for example, is bad for trading since the profile is still developing and realistically you want to start trading where there has been development so that you have more information.

Closing Thoughts

Like I said before there are a lot of things to consider and calculate before starting to trade. You need to know what kind of day is by doing the opening range lines, if we are trending in a certain way then you can’t trade using the mean reversion strategy. This and a lot of other factors are going to influence how you trade for a specific date but the Volume Profile will help you drastically.

I have enrolled in a lot of courses before and some of them were only the topic of volume profile, and in the end, I managed to understand it well enough. This information is not something that gets shown to a lot of people for free so I hope that you have understood something here and if you want you can enroll in a course with me for more advanced methods on trading with Volume Profile.

If you liked this article, check out our in-depth free training here.

Chartbook Definition For Sierra Charts

TradingView Tutorial for setting up the Volume Profile

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