A Richer Technical View: Analyzing Volume by Price

Tired of trying to guess where support and resistance levels are located for the underlying instruments you’re trading? Do you want a deeper view of the supply and demand dynamics currently at work in stocks, futures, or any other investment in which you can measure volume? Look no further, because the thinkorswim^® Volume Profile study can help shed new light on support and resistance.

Different Dimension of Price/Volume

The Volume Profile study displays trading activity over a specified time period at specific price levels. Unlike a typical volume study that aggregates volume for a specified time period, like daily, and displays a vertical column of the total volume for that period, the Volume Profile study plots a horizontal histogram of volume traded at specific prices.

The widest horizontal row of the Volume Profile indicator defines the specific price at which the most volume has traded over the specified time period. This specific price is referred to as the point of control (POC). The range of prices around the POC that contain 70% of total volume for the period is called the value area.

Figure 1 shows an example of the POC and value area in the Volume Profile study applied to the E-mini S&P 500 Index Futures (/ES) on a year-to-date chart. The POC is highlighted by the red horizontal row at 2,051.5; the value area is highlighted in the purple region between 1,921.00 and 2,125.50. (The /ES trades in 0.25-point increments.)

Practical Application of Volume Profile

Analyzing a Volume Profile chart is a bit different from classical technical analysis. Let’s walk through a couple of hypothetical scenarios.

First, observe in figure 1 that /ES recently rallied up to new highs, above the value area high at 2,125.50. Put another way, the /ES is trading above its value area. This is typically bullish, but that’s about as much as you can conclude from this observation.

From here, the /ES could spend more time near its highs and build more volume at prices around 2,165. This could eventually lead to the value area shifting higher, particularly if the /ES starts trending higher.

But what if the /ES starts to pull back?

Support should materialize on the first test of the value area high at 2,125.50. Notice there isn’t a support level—in the traditional sense, based on the candlestick chart—at that level.

What happens if the /ES experiences a deeper pullback and falls back below the value area high? This is where the POC down at 2,051.50 could come into play. Markets have memory, and since POC is where the most volume traded since the beginning of the year, this level could act like a magnet. It’s likely that if the /ES were to fall back into the value area, it would keep going down to the POC.