Updated: Apr 16
If you're a trader looking for a reliable tool to analyse price action and volume, you may want to consider using the fixed range volume profile. This advanced analysis technique provides valuable insights into the behaviour of the market and helps traders make informed decisions. In this article, we'll explore the fixed range volume profile in depth, including its definition, how it works, and its benefits for traders.
What is Fixed Range Volume Profile?
Fixed range volume profile is a technical analysis tool that displays the volume traded at each price level within a specific range. It plots a histogram on the price chart that shows the distribution of trading volume at each price level. The profile is created by selecting a specific range of prices, typically from a few ticks to several points, and then calculating the volume traded at each price level within that range.
The fixed range volume profile is different from the traditional volume profile, which shows the volume traded at each price level over a specific period, such as a day or a week. The fixed range profile, on the other hand, focuses on a specific price range and provides a detailed analysis of the volume traded within that range.
How Does Fixed Range Volume Profile Work?
To create a fixed range volume profile, traders first select a specific price range. They can use various methods to determine the range, such as identifying key support and resistance levels, using Fibonacci retracements, or simply choosing a fixed range of prices. Once the range is selected, the volume traded at each price level within that range is calculated and displayed as a histogram on the price chart.
The fixed range volume profile can be used in combination with other technical indicators, such as moving averages, trend lines, and support and resistance levels, to provide a comprehensive analysis of the market. Traders can use the information provided by the profile to identify key price levels, measure the strength of trends, and anticipate potential price reversals.
How To Read Volume Profile Structures
Understanding volume profile structures is crucial for inexperienced traders looking to gain valuable insights into the market's behaviour. In essence, a volume profile structure illustrates how much trading activity has occurred at various price levels over a specified time range.
The value area encompasses around 70% of the total trading volume during the fixed range timeframe, signifying strong support or resistance levels where the majority of transactions took place.
Inside this zone, price stability is often observed as market participants deem these prices fair. On the other hand, LVNs represent areas with significantly lower trading volumes compared to adjacent levels.
Lastly, POC refers to the highest traded volume level within the chosen fixed range – often acting as a magnet for future prices due to its perceived significance by market participants.
To effectively read these structures in your charts, you may utilise TradingView's Volume Profile Indicator which highlights critical data points such as POC and value area boundaries.
Types Of Volume Profile
In the world of trading, there are several types of Volume Profile indicators that can be utilised by inexperienced traders to gain valuable insights into market activity. Each type serves a unique purpose and provides distinct information about price levels in relation to volume:
1. Fixed Range Volume Profile: This indicator focuses on a specific time range chosen by the trader, giving them more control over their analysis. It enables the identification of key support and resistance levels based on historical trading volume within the selected range.
2. Visible Range Volume Profile: Unlike its fixed counterpart, this version auto-adjusts based on the visible area of the chart. It provides real-time updates as the trader moves or zooms in and out of their chart, offering dynamic visibility into how volume is distributed across different price levels.
3. Session Volume Profile: Designed for intraday traders, it analyses volume distribution within single trading sessions such as daily or weekly periods. This profile helps identify shifts in market sentiment between sessions and potential turning points in price action.
4. Developing Volume Profile: As a forward-looking indicator, this tool plots real-time volume at various price levels during an ongoing trading session or period. It allows traders to monitor unfolding market activity and assess possible changes in supply and demand dynamics.
5 Visible/volume histogram: A simplified version of volume profile that displays volume data as a histogram on the side of your chart, providing a quick visual representation of how volume is distributed at various prices without additional calculations or complexities.
By understanding these different types of Volume Profiles, inexperienced traders can make informed decisions on which one best suits their strategies and goals in analysing market behaviour.
Benefits of Fixed Range Volume Profile for Traders
Fixed range volume profile provides several benefits for traders, including:
1. Better Understanding of Market Behaviour
Fixed range volume profile provides a detailed analysis of the volume traded at each price level within a specific range. This information helps traders understand how the market is behaving at different price levels and identify key support and resistance levels.
2. Improved Trading Decisions
By providing a comprehensive analysis of the market, fixed range volume profile helps traders make informed trading decisions. Traders can use the information provided by the profile to identify potential entry and exit points, measure the strength of trends, and anticipate potential price reversals.
3. Ability to Identify High-Volume Areas
Fixed range volume profile helps traders identify areas of high trading activity, which can be useful for determining the strength of support and resistance levels. By identifying these areas, traders can gain a better understanding of market sentiment and adjust their trading strategies accordingly.
4. Increased Confidence in Trading
By providing a comprehensive analysis of the market, fixed range volume profile helps traders gain confidence in their trading decisions. Traders can use the information provided by the profile to confirm their trading strategies and make adjustments as needed.
How To Analyse And Interpret Volume Profile Data
To analyse and interpret volume profile data, traders should focus on identifying the market sentiment by reading volume profile shapes and structures, as well as using volume profile in conjunction with other technical indicators.
Identifying Market Sentiment
One important aspect of using fixed range volume profiles in trading is identifying market sentiment. Market sentiment refers to the overall attitude or mood of traders towards a particular asset, which can greatly influence its price movements.
For example, if a high volume cluster is formed at a certain price level on the chart, this suggests that there is strong buying or selling pressure at that point. Traders can use this information to identify key levels of support and resistance and make more informed decisions about where to enter or exit trades.
Reading Volume Profile Shapes And Structures
One of the most crucial skills to learn for successful fixed range volume profile trading is how to read volume profile shapes and structures. A volume profile displays a visual representation of the price levels where significant volumes have been traded, at a specific time frame.
To interpret volume profiles accurately, traders should look out for various shapes and patterns that indicate different market conditions. For instance, a bell-shaped profile suggests that there is an equal number of buyers and sellers in the market.
However, if one side dominates over the other significantly; it results in asymmetric or skewed profiles.
By reading both visible range and fixed range volume profiles alongside each other or with other order flow indicators like Market Profile, inexperienced traders can identify substantial opportunities while minimising their risk exposure in dynamic markets like cryptocurrencies or Forex charts by analysing on platforms like TradingView.
Using Volume Profile With Other Technical Indicators
Volume Profile indicator is just one of many technical indicators that traders can use to gain insights into market trends. When used in conjunction with other technical tools, such as moving averages or oscillators, it can provide a more complete picture of the market. Here are some tips for using Volume Profile with other technical indicators:
1. Combine Volume Profile with Moving Averages: Volume Profile can help identify areas of support and resistance while moving averages show the trend direction. By analysing both together, traders can make better trading decisions.
2. Use RSI and MACD to Confirm Market Sentiment: The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both momentum indicators that can confirm market sentiment identified by volume profile data.
3. Watch for Divergences: If a divergence between price action and volume profile data is detected, traders should pay attention as it could indicate a potential trend reversal.
4. Use Bollinger Bands with Volume Profile: Bollinger Bands can help determine the overall price range of an asset, while volume profile provides information about where buyers and sellers are entering and exiting the market. By combining the two, traders can develop more accurate trading strategies.
By using Volume Profile in tandem with other technical analysis tools, inexperienced traders can gain better insights into market trends and make more informed trading decisions.
Common Mistakes And Pitfalls To Avoid
Traders should be wary of over-reliance on Fixed Range Volume Profile and avoid neglecting other technical indicators, while maintaining patience and discipline to adapt to the changing market conditions.
Overreliance On Volume Profile
While volume profile is a powerful tool for analysing market sentiment and identifying key support and resistance levels, traders should be wary of overreliance on this indicator.
It's important to remember that technical analysis indicators like volume profile are just one piece of the puzzle when it comes to successful trading. Traders should also consider fundamental factors affecting the market, as well as broader economic trends, political events, and news headlines.
Lack Of Patience And Discipline
One of the most common mistakes inexperienced traders make when using fixed range volume profile is a lack of patience and discipline. It's important to understand that analysing market data and making informed trading decisions takes time, and rushing into trades without fully understanding the data can lead to costly mistakes.
It's also essential to stay disciplined in following trading strategies while using a fixed range volume profile. Emotional decision-making based on fear or greed can cloud judgement and lead to impulsive actions that go against established strategies.
To avoid this pitfall, it's crucial for traders to stick with their predetermined plans, manage risk effectively, and remain calm during periods of market volatility.
Not Adapting To Changing Market Conditions
It's crucial for traders to adapt quickly to changing market conditions, and failure to do so can result in significant losses. In the world of fixed range volume profile trading, this means keeping a close eye on how price levels and volume profiles shift over time.
The data provided by fixed range volume profile indicators is incredibly valuable when interpreted correctly. However, inexperienced traders sometimes fail to consider that market trends don't always remain stable or predictable.
Avoiding this mistake requires patience and discipline when analysing market data. Traders should avoid over relying on their chosen indicators alone without considering wider economic factors as well.
The best approach is often a multi-pronged one; combining fixed range volume profile with other technical analysis tools like trend lines or moving averages helps identify changes in market sentiment more effectively than any individual tool could achieve alone.
Fixed range volume profile is a powerful tool for trading analysis that provides valuable insights into the behaviour of the market. By focusing on a specific price range and analysing the volume traded at each price level within that range, traders can gain a better understanding of market behaviour and make more informed trading decisions. If you're a trader looking for a reliable tool to analyse price action and volume, fixed range volume profile is definitely worth considering.
What is the difference between fixed range volume profile and traditional volume profile?
Fixed range volume profile focuses on a specific price range and provides a detailed analysis of the volume traded at each price level within that range. Traditional volume profile, on the other hand, shows the volume traded at each price level over a specific period, such as a day or a week.
How do traders use fixed range volume profile in their analysis?
Traders use fixed range volume profile to identify key price levels, measure the strength of trends, and anticipate potential price reversals. They can also use it in combination with other technical indicators to provide a comprehensive analysis of the market.
What price range should traders select when using fixed range volume profile?
Traders can use various methods to determine the price range, such as identifying key support and resistance levels, using Fibonacci retracements, or simply choosing a fixed range of prices based on their trading strategy and goals.
Can fixed range volume profile be used for any market or asset class?
Yes, fixed range volume profile can be used for any market or asset class that has sufficient volume and liquidity. It is commonly used in stocks, futures, and forex trading.
Is fixed range volume profile suitable for beginner traders?
Fixed range volume profile is a more advanced technical analysis tool and may not be suitable for beginner traders who are still developing their trading skills and knowledge. However, with proper education and practice, any trader can learn how to effectively use fixed range volume profile in their analysis.
About the Author:
Spitty is a full-time trader and educator at Spitfire Traders. With years of experience in the markets, he has developed a trading strategy that relies solely on technical analysis. He has a passion for helping others become successful traders and regularly provides education and guidance to students at Spitfire Traders.
As a believer in continuous learning and improvement, he has devoted his career to developing effective trading strategies and sharing them with others. Through his unique approach to day trading, he has helped numerous students become consistently profitable traders.
At Spitfire Traders, he is committed to providing the education and tools necessary for traders to succeed in the market. With a focus on technical analysis and risk management, he is dedicated to helping traders achieve their goals and become successful in their day trading journey.