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Understanding Volume Profiles and its Terminology

Understanding Volume Profiles: Key Concepts and Strategic Trading

Volume Profile is a sophisticated charting tool used in technical analysis to provide insights into trading activity over a specified time period. In this article, we'll explore some fundamental components of Volume Profiles, including Value Area (VA), Value Area Low (VAL), Value Area High (VAH), Point of Control (POC), and Naked Point of Control (NPOC), along with how to strategically use these elements in trading.

Value Area (VA)

The Value Area represents the range where a significant percentage of trading volume has occurred, typically encompassing 70% of the total volume traded within the profile. The VA is crucial because it shows where the majority of

trading interest lies, indicating price levels where the market has found "value" or stability.

  • Value Area Low (VAL): This is the lower boundary of the Value Area (GREEN LINE), marking the lowest price within the range where significant volume was traded. VAL can act as a support level where buying interest might increase, potentially halting a price decline. When the price trades below the VAL, it's at your advantage to look to buy, as this might suggest the market is undervalued at this point.

  • Value Area High (VAH): This is the upper boundary of the Value Area, indicating the highest price where substantial volume was executed (RED LINE). VAH often serves as a resistance level where selling pressure might intensify, possibly capping price increases. When the price approaches or exceeds the VAH, it's at your advantage to look to sell, indicating the market could be overvalued for the moment.

Point of Control (POC)

The Point of Control is the price level with the highest traded volume within the profile period. This point is where the market has shown the most activity, suggesting a level of price where both buyers and sellers have agreed in large numbers. The POC can act both as a magnet where price tends to return or as a pivot point where price action might reverse or consolidate.

Naked point of Control (NPOC)

While the POC represents high volume at a particular price level, a Naked Point of Control (NPOC-YELLOW LINE) is a POC from a previous time frame that is no longer within the current Value Area. An NPOC becomes "naked" when no new volume is added to it in subsequent profiles. This absence of volume can imply:

  • Potential Targets I consider NPOCs as yellow bricks in the road. Targets for future price.

Practical Application in Trading

Here's how these insights can be practically applied in trading:

Entry and Exit Points:

  • ​Long Positions: Look for entry points near or below the VAL, especially if other indicators support a potential upward move back into the Value Area.

  • Short Positions: Consider selling or shorting when prices are at or near the VAH, particularly if there's evidence of resistance or if momentum indicators suggest an overbought condition.

Risk Management:

  • Use VAL and VAH as natural levels for setting stop-losses. Below VAL for long positions or above VAH for short positions can help manage risk by defining clear exit points.​

Market Context:

  • Always consider the broader market context. In strong uptrends, prices might often exceed VAH, suggesting a new higher value area might be forming. Similarly, in downtrends, prices might not respect the VAL as support.

Confirmation with Other Indicators:

Understanding Volume Profiles offers a nuanced view of market dynamics. By leveraging the Value Area, its Low and High, along with the Point of Control and Naked Point of Control, traders can align their strategies with where the market has historically shown significant activity. Recognizing when to buy near or below VAL or sell near or at VAH can enhance trading outcomes. However, these insights should be used in conjunction with a comprehensive trading plan and risk management strategy to navigate the complexities of the market effectively.

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