A key component of order flow analysis, Volume Profile can be used in a variety of ways. Displaying the concentration of volume distributed at each price level, Volume Profile can provide insight into what the market might do next.
Below are 3 simple Volume Profile strategies which compare the current day’s opening price to the previous day’s Volume Profile:
- Bullish signal
- Bearish signal
- “Runner” in either direction
For a bullish volume profile signal, look for the current day’s opening price to fall above the prior day’s value area, but below the prior day’s profile high. When the open is in this range, watch for price to retrace back to the previous day’s Point of Control (POC) and then reverse in the positive direction from there.
When price retraces back to the previous day’s POC, this is a potential buying opportunity.
In the example below, 2 days of Micro E-mini S&P 500 futures (MES) trading are shown via 60-minute price bars. The opening price of the 2nd day was above the previous day’s value area but not above the profile high. As we can see, price retraced back towards the first day’s POC (yellow line) before moving up.
Opposite to the previous example, for a bearish signal watch for the current day’s open to be below the previous day’s value area but still above the previous day’s profile low. If the open is in this range, price could first retrace up towards the previous day’s POC before falling and putting in new lows.
Therefore, a potential selling opportunity occurs when price retraces at the beginning of the day.
In the example below, price opened below the previous day’s close but above the previous day’s profile low. As you can see, price first moved up towards the previous day’s POC before falling and putting in lower lows.
Unique to both previous examples, if the opening price falls entirely outside of the previous day’s profile, this can be interpreted as a potential “runner” in the opening direction.
That is, if price opens completely above the previous day’s profile, price could potentially open up and continue to “run” up the entire session. Conversely, if price opens completely below the previous day’s profile, this could be interpreted as a potential runner on the short side.
In the example below, after price opened below the previous day’s profile low, price continued downward to close lower.
Please note: As with all other indicators and technical analysis approaches, using Volume Profile can result in false signals and risk management is essential for traders to protect capital.
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