Why is volume important?
Volume is an additional dimension alongside time and price. Analyzing volume helps to understand price behavior within the context of trading activity, providing deeper insight into supply and demand dynamics. This elevates a trader’s approach and offers an advantage over many retail participants who rely on simple techniques like lagging indicators or make decisions based on emotions.
What is volume profile?
Volume profile is a volume analysis tool used by professional traders. It appears as a horizontal histogram that shows how trading volume (expressed, for example, in the number of contracts) is distributed across price levels over a specified period.
The logic is simple: the longer the bar on the histogram, the higher the volume traded at that price level; the shorter the bar, the lower the volume. This makes reading the volume profile on a chart visually convenient, quick, and, most importantly, insightful.
To begin using volume profile, refer to the articles on the ATAS blog, for example: How to Start Using Volume Profile in Trading
Market Profile and Volume Profile: what is the difference?
Both concepts relate to analyzing trading activity across price levels, but there is a slight conceptual difference.
- Market Profile originated in the 1980s when Peter Steidlmayer introduced the idea of visualizing price movement throughout the trading day using TPOs (Time Price Opportunities). Each TPO represents a mark showing that the price traded at a specific level during a certain time.
- Volume Profile, in contrast, is based on the trading volumes at different price levels. It is a more modern and widely used concept, as advances in technology have produced volume analysis tools that demonstrate high effectiveness and attract many traders.
In short, Volume Profile focuses solely on volume (sometimes broken down into bid and ask volumes), while Market Profile generally relies on time-based data and is more academic. In our article on the Session Volume Profile indicator, we provided a list of classic literature on the topic.