Volume Profile, The Distribution of Volume across Prices. Volume profile and Volume Point of Control (Vpoc): Volume Profile define, at each price level, the amount of volume traded at that price, creating thus, a distribution of price x volume in your charts. The most traded price (the one with most volume) is defined as VPOC, or Volume Point of Control. The important thing to know here is that: Price is attracted by High Volume prices or “levels” (balance areas). And rejected by Low Volume prices or “levels” (Imbalance areas or highs and lows in charts, Gaps, Prices where it has bounced several times).
Think of it this way: Balanced areas are equal in Supply and Demand, Imbalanced areas are Supply and Demand disequilibrium. Why?. As you already know, balanced areas are in equilibrium therefore doesnt present opportunity. Imbalanced areas are seeking value and not in equilibrium, therefore present opportunity. Remember that from Market Technical Analysis?.
Using the Volume Point of Control (Vpoc) when the Market opens OUTSIDE of the previous day’s range: When The Market opens or is OUTSIDE previous day’s trading range. The Market is away from Vpoc (or fair price, value or balance) it represents Supply and Demand price Levels. Whenever you open a chart you must see where the VPOC of the previous day is on a volume profile, since it will be a Support or Resistance level when the market opens OUTSIDE the previous day’s range. This happens because since the market is away from value (imbalanced) , it will tend to look for value or equilibrium moving towards High volume areas or previous VPOCs. ***( The previous day’s range is defined as: The highest price of the previous day minus the Lowest price of the previous day).***
In the above chart you can see how the Vpoc of the volume profile from yesterday was tested. The Market changed value and is now more expensive so it rejects previous lower prices. Lets use an example with The Orange Market. Let’s say that people hear in the news that there is a flu spread in town and that they need vitamin C. They hurry and buy oranges in double the amount they normally do, just for fear of catching the flu when there is no really a necessity to buy more oranges. This Behavior makes the price of oranges go up (More Demand) as The orange Market looks for equilibrium (higher prices to absorb more demand). Producers (Suppliers) start jumping on new profits as prices go up. Suddenly people find themselves eating two oranges a day and paying a high price for the two of them when there is no need to. Now something has changed!. And that is the perception of value in the oranges.Oranges should be cheap we are even on-season !, people think!. They are too expensive now. This new equilibrium formed at this new price is not “fair” or perceived to be the “adequate”, but people kept on buying them nonetheless. Now that the perception has changed and the price is believe to be too high for something they do not really need (two oranges per person). They now buy one orange and some do not even buy anymore, making the price go back down again after forming a price level at that High price, where a lot of trading (buying and selling) was conducted for a period of time. Now Let’s say that 6 months passed, (in futures trading it would be just ONE day to change the perception of value or even minutes) and another flu spread news is coming, this time suppliers start raising price waiting for the demand to come along. People in fact, start to buy again because they need oranges, moving the price up until the “high price level” that was formed 6 months ago in the previous flu spread. This time even though some people buy oranges, not so many people buy and they also know that THAT “high price level” formed 6 months ago is too expensive and unfair, so that price is REJECTED by the Market making it act as a Resistance (Supply) level. “The high price level” from 6 months ago where people traded a lot oranges (high volume are or vpoc on a volume profile) is now unfair or Imbalance, so when The Orange Market tried to find “Value, Equilibrium or Balance” in “That high price level” from 6 months ago, It failed, not finding it. This is normally the pullbacks or tests you see after a new trends develop either up or down in the Futures Market, the Stock Market, or the Oranges Market. When the market is away from value and has established value elsewhere, it normally goes back to that most traded price (Vpoc on a volume profile), “checking out” that “That high price level” was really not a fair price. Let’s take a look at chart where “low price levels” formed from “change of perception” and acted as Demand or Support level, just the inverse of the Oranges examples where “That high price level” of the example acted as Resistance.
In the third day of trading (circles) The Market tested a Vpoc from 2 days ago (lower red line). It moved down to the lower red line (vpoc) from higher prices to “check out” that, at the prices it is trading right now, (higher prices from lower red line or lower Vpoc) it is trading in “fair prices” or “accepting higher prices” than those established in the lower red line or Vpoc. You can notice that, since the market was away from that Vpoc (red lower line), and establishing new levels of higher prices, it traveled all the way down until it found support (Demand) at an unfair price. A price where demand cannot be lower.
Now… Using the Volume Point of Control (Vpoc) when the Market opens INSIDE of the previous day’s range: When The Market opens or is INSIDE previous day’s trading range. The Market is in the Vpoc (or fair price, value or balance) it DOES NOT represent opportunity, it is balanced. If we open INSIDE the previous day’s range DO NOT take Vpoc into account. A Vpoc is a balanced area or equilibrium, if price is near it or in it, the market is “fair, on value, balance or in a trading range”, stay out!. For example, If you have the same price (value or balance “price level”) for oranges in a whole year the “fair price, value or balance price” remains the same all year long offering no opportunity for neither Sellers nor Buyers.
So in brief we have that: When The Market opens or is OUTSIDE previous day’s trading range. The Market is away from Vpoc (or fair price, value or balance) it represents Supply and Demand price Levels. When The Market opens or is INSIDE previous day’s trading range. The Market is in the Vpoc (or fair price, value or balance) it DOES NOT represent opportunity, it is balanced. Ok my friend, i know this part was complicated but do not get discourage with all the information and volume profile, you will get the hang of it, once you start using it. You can always send me your questions if you have any!. Now let’s move from the volume profile to the Technical analysis indicators I use
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