Volume Profile tells us two things: When and Where trades are taking place. This is because Volume Profile spells out price history in it’s purest form. By looking at volume (the number of trades taking place at certain price points), we can see where the most activity is taking place historically. This helps us to predict future price moves under normal circumstances.
By mapping out volume profile, we can see where price is favored or ignored during a set timeframe of trading history. Volume profile is constantly changing and evolving during the live trading session. Each time a new order is issued, we find this information fluctuating and new high & low volume nodes appearing.
High & Low Volume nodes move cyclically throughout a trading session. They often inform us of “pull” towards a certain price area. The High Volume Node area is where a high volume of trades has already taken place. Price will often be drawn back to this area in a trading session. The Low Volume Nodes are the opposite of this. They are areas where there isn’t much pull or draw to that certain price. The High Volume Nodes often show key areas of support or resistance where institutional traders will congregate.
Human emotion also plays a key factor in creating these levels of price and support/resistance. Those afraid of losing money on a short trade as support levels fall will often buy to cover themselves. Traders who are already positioned favorably may buy into position to make more money. These decisions based on greed or fear will play into the area, further enforcing the level (like a self-fulfilling prophecy).
However, news announcements and reports being published can affect future price moves as well. It is a good idea to have these reports and announcements marked out for the week so you avoid trading during these unpredictable times.
In conclusion, these reasons are why it is important to watch Volume Profile and how it helps to inform your trade. Not only does it help you figure out when and where trades are taking place, it can also predict areas of fear and greed expressed by your fellow traders!