Volume Profile Explained: Finding Value in the Noise

Look at a standard candlestick chart. It tells you “Price went to 1.1000.” But it doesn’t tell you how much business was done there.

Was it one guy buying 1 lot? Or was it JP Morgan buying 10,000 lots?

A candlestick treats both events equally. Volume Profile shows the truth.

Historical Context

Developed from Steidlmayer’s Market Profile, Volume Profile isolates Quantity rather than Time. Though specific “bounce rates” are proprietary to HFT firms, the Point of Control (POC) acts as a high-probability “Fair Value” magnet. When price deviates from the POC, it acts like a stretched rubber band.

Key Findings:

• The Magnet: In balanced markets, price returns to the POC 70-80% of the time after a deviation.
• The Rejection: Low Volume Nodes (LVNs) represent “unfair prices” that the market rejects quickly, creating fast moves (gaps).
• The Institutional Footprint: High Volume Nodes indicate where “Smart Money” has built major positions.

J. Peter Steidlmayer, of the Chicago Board of Trade, discovered that markets distribute volume in a bell curve (Normal Distribution). His famous “80% Rule” states: If price opens outside the Value Area, but then closes inside it for two consecutive 30-minute periods, there is an 80% probability it will traverse the entire Value Area to the other side. We trade this “Value Rejection” every single day.

The Delta: The Auction Theory

The market is not a line on a chart. It is an Auction. Its goal is to find a price where buyers and sellers agree to do business.

• High Volume Areas (High Value): Prices where everyone is happy to trade. Price tends to stay here. (Balance).
• Low Volume Areas (Low Value): Prices where no one wants to trade. Price moves through these zones very fast. (Imbalance).

Core Components

1. Point of Control (POC)

This is the “Fair Price.” It is the level with the highest volume spike. Strategy: If price moves away from the POC without strong news, it will likely be pulled back to it (Magnet Effect).

2. Value Area (VA)

The range containing 70% of the volume.

• Value Area High (VAH): Resistance.
• Value Area Low (VAL): Support.

The Strategy: The “Fade” Play

This strategy works best in ranging markets (which is 80% of the time).

1. I Identify the Value Area of the previous day (or the current consolidation).
2. I Wait for Price to Exit the Value Area.
3. Watch for Rejection: If price rallies above the VAH but starts to stall and enters back inside the Value Area…
4. The Trigger: I Short the re-entry.
5. The Target: The POC (Magnet) or the other side of the Value Area (VAL).

Why it works: The market tried to find new value higher, failed, and is now returning to the “agreed” fair price.

The Strategy: The “LVN Skip” Play

Low Volume Nodes (LVN) are the “gaps” in the volume profile. Think of them as pockets of air. If price enters an LVN, it usually skips through it rapidly to get to the next High Volume Node.

The Move: If price breaks a High Volume Node and enters an LVN, Trade with the momentum. Target the start of the next High Volume Node.

Conclusion

Stop guessing where Support is. A line you drew connecting two wicks is subjective. A Volume Node showing 50,000 lots traded is objective.

Trade the volume.

Are you trading the price, or the value?