Volume profile and market profile

You can read a volume profile, find its point of control, explain the value area idea and the difference to market profile.

Where, not when

The volume panel under a chart tells you when trading happened: this day was busy, that one quiet. It does not tell you where, at which prices, the market did most of its business.

A profile answers that second question. It turns volume sideways and sorts it by price, and it is a favorite tool of futures and day traders.

The busiest price

A volume profile is a horizontal histogram: for each price level, a bar shows how much was traded there during a chosen period. StockCharts calls its version volume-by-price and notes that high-volume price ranges can mark support and resistance.

Three terms come with it:

Point of control: the price level with the most volume, the longest bar. The point of control is where the market traded most actively during the period.
Value area: the range around it in which most of the volume traded, often defined as about 70%. The value area idea comes from market profile and borrows from the shape of a normal distribution.
Thin areas: price levels with little volume, which the market passed through quickly.

Market profile is the older cousin. It was developed by J. Peter Steidlmayer at the Chicago Board of Trade and described in his book with Kevin Koy. It measures time at each price, using letters for each 30-minute period, rather than volume. The ideas are similar: where the market spent the most time or traded the most volume, buyers and sellers agreed on value.

How traders use profiles:

The point of control and value area edges are watched as possible support, resistance or pivots.
A return toward the point of control after a move away is sometimes expected, a magnet effect.
Thin areas are expected to be crossed quickly.

The chart's profile is simplified: it spreads each candle's volume evenly over its range, while real profiles use trades at each price.

Thin areas move fast

In the fictional chart, the price moves sideways between about 49.40 and 51.40 for most of 28 candles. The profile is thick in this range, and its point of control sits between about 50.14 and 50.52.

On candle 29, the price breaks above the range, rising to 51.42.
Over the next candles, it climbs through prices where very little had traded before, reaching 52.78.
The profile above 51.40 stays thin.

A profile reader would see the breakout as the market leaving an area of agreed value and searching for a new one. The point of control at about 50.30 marks where the old agreement was, and a deep pullback might test it. Nothing in the profile says whether the breakout will hold.

Common mistakes

Forgetting the window. A different start or end date changes the profile.
Treating the point of control as a wall. It marks activity, not a barrier.
Using thin data. In illiquid markets or on short windows, profiles are noisy.
Mixing volume and time profiles. They answer related but different questions.

The takeaway

A volume profile shows how much traded at each price. The busiest price, the point of control, often acts like a magnet or a pivot.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the point of control, the price area with the most volume.

Tap the chart.

The longest bar of the profile sits between about 50.14 and 50.52, in the middle of the long sideways phase where most trading happened.
2What does a volume profile show that a normal volume panel does not?

The usual volume bars sit under the chart, one per period. A profile turns them sideways and sorts them by price.
3What is the value area in profile analysis?

The idea comes from market profile and the shape of a normal distribution. Prices outside it saw less agreement.
4Why can thin areas of a profile matter?

Thin areas show prices the market passed through without much agreement. Traders often expect fast moves there, though nothing is certain.

of 4 correct.

Sources

StockCharts ChartSchool: Volume-by-Price
J. Peter Steidlmayer & Kevin Koy: Markets and Market Logic (1986, book)

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