Despite every price movement being indicative of something, conventional charts do not adequately clarify why traders are either buying, selling or accepting the price being offered. To be able to decode the underlying mechanism driving market activity, traders often resort to instruments such as Market Profile and Volume Profile. Market Profile is an instrument which can tell how long the market had spent at a particular price while Volume Profile is the one which indicates where trading activity was greatest.
Although they are often compared, each provides a different perspective on market behavior. This guide on Market Profile and Volume Profile would explain what they mean, how they operate, their primary differences as well as how traders may utilize these two instruments for better market analysis.
What Is Market Profile?
Imagine two traders looking at the same chart. One focuses on where price spent the most time, while the other looks at where the highest trading volume occurred. Although both are analyzing the same market, they may reach completely different conclusions.
This assists traders in understanding the market framework and determining the levels at which prices are accepted or rejected, as well as in gauging the dynamics between buyers and sellers.
Market Profile does not focus simply on price movements through time, as traditional charts typically do, but rather reflects the market as a trading process. It tracks the market’s search for fair value while showing how traders react to price movements away from fair levels.
Peter Steidlmayer is credited with the introduction of the concept of Market Profile in the USA in the 1980s as he was working as a trader at the Chicago Board of Trade (CBOT). His theory revolved around the idea of the markets functioning similarly to auctions where buyers and sellers compete to find an ideal price where enough volumes are traded.
According to the theory, the longer the market remains within price levels, the more the participants come to an agreement on the price levels. In contrast, rapid rejections of prices signify that the market did not.
Price levels where the market stays for a longer time signal sources of agreement on price for market players. In contrast, levels where prices are rapidly rejected show that the market cannot find sufficient interest for trading at those levels.
To illustrate, consider a market operating in the range of $100 to $105. If prices return repeatedly to $102 and stay there for a certain duration, Market Profile indicates that $102 is a fully accepted price.
On the flip side, in case the prices quickly rise to $110 but fall back again, it means that the market has rejected that higher price. This ability to identify price acceptance and rejection is what makes Market Profile unique compared to many tools used in technical analysis.
How Does Market Profile Work?
Market Profile works by showing price movement in terms of Time Price Opportunities or TPOs. A TPO is the time spent by the market trading at a particular price in a specific period. While defining market movements, Market Profile does not use only candlesticks but shows distribution to find how the trading activity is organized during the trading session. A typical Market Profile chart contains a number of key components.
Time Price Opportunity (TPO)
Market Profile revolves around the concept of the relation between time and price.
When the market stays for a longer duration at a certain price, it indicates the comfort level of sellers and buyers to make trades there.
This results in a larger profile area as more TPO are created. Conversely, quick movements of price through a level will produce fewer TPO. These levels usually signify transient price zones where enough participation failed to take place.
The analysis of TPO distribution helps the trader understand whether the market:
- Accepts the price
- Rejects the price
- Is on its way from balance to imbalance
- Prepares for a possible breakout
Point of Control (POC)
The Point of Control (POC) represents one of the major levels of analysis within the discipline of Market Profile. It is the price the market has spent the longest time trading during one trading session.
Since the level indicates the price with the most acceptance, traders pay attention to it as a potential support or resistance level. If the price moved away from the POC and then returned to it, traders will watch the market reaction.
Value Area for Market Profile
The Value Area is the price area where the major portion of trading was performed during a trading session. Usually, it involves about 70% of market activity and helps traders to find out the price, which the market considers fair. The Value Area has two key levels:
- Value Area High (VAH): It is the upper limit of the value area.
- Value Area Low (VAL): It is the lower limit of the value area.
When the price exceeds these boundary limits, traders ascertain whether the market will accept the new trading area or go back to the previous value area quite soon.
Initial Balance (IB) of Market Profile
The Initial Balance is a trading term, meaning the trading range established during the early periods of a trading session. Many traders deal with the Market Profile use this range to predict possible stretching moves.
The price being able to break through an Initial Balance zone and receive a lot of quotes may mean that the market is in the course of a trend day. Otherwise, the breakout will signify a rejection if the price returns into the Initial Balance range.
Before trading breakouts around major economic releases, many traders monitor the economic calendar to anticipate periods of increased volatility.
Market Profile and Market Auction Theory
Market Profile is closely based on Auction Market Theory. Market Profile is linked with Auction Theory, which refers to financial markets as perpetual auctions. In this view:
- The market moves higher to find willing sellers.
- The market moves lower to attract willing buyers.
- After deciding, buyers and sellers reach equilibrium.
This generates the two main states of the market:
Balanced Market
Balanced market occurs when prices stay in a stable range. Price rotates around a central value area due to agreement between buyers and sellers. In this case, Market Profile assists the traders in finding such periods and spotting possible breakout events.
Imbalanced Market
Unbalanced market is when one party prevails. Strong buying or selling moves prices away from the established level. Market Profile helps trades analyze if the shift is going to hold or if the market will revert to its previous price level.
Some traders combine Market Profile with sentiment analysis to determine whether market participants are likely to continue accepting current prices.
What Is Volume Profile?
Volume Profile is a trading analysis tool that provides information about the frequency of transactions at different prices during a selected timeline. Unlike the generic volume indicators that focus on showing the volume with respect to time, Volume Profile shows the data in respect to price levels, which allows traders to understand what is the price range with the highest or lowest level of activity.
Simply put, Volume Profile answers the key question of “What is the price level with the biggest trading activity?” Market Profile is focused on the time of market staying at a particular price while Volume Profile focuses on the amount of volume exchanged at a specific price.
These characteristics make Volume Profile vital for traders who need to learn the level of interest from buyers and sellers. To illustrate this, let’s consider a case when the currency pair is trading for a couple of hours around a certain price with very high volume.
Under these circumstances, Volume Profile will show the relevant area as one where most of the market participants have a significant activity. The Volume Profile method is extensively utilized by professional investors regardless of the investment field, such as in stocks, securities, cryptocurrency, and in the Forex trading market.
The reliability of the results, however, can vary depending on the quality of volume information. This factor is especially important for Forex trading, which is a decentralized market.
Volume Profile vs Traditional Volume Indicators
Even though many traders are familiar with the conventional volume indicator, there is a notable distinction between basic volume and Volume Profile. In the case of regular volume, the chart is usually located below the price chart and shows the volume of trades in a specific period. For example:
- High volume means that a lot of activity happened within that timeframe.
- Low volume means that too few trades occurred in the market.
Nonetheless, conventional volume information does not indicate price levels for each trade. Volume Profile solves this problem by presenting the way the volume is distributed among different price levels.
| Traditional Volume | Volume Profile |
|---|---|
| Shows volume over time | Shows volume at specific price levels |
| Appears vertically below charts | Appears horizontally alongside price |
| Answers “when did activity happen?” | Answers “where did activity happen?” |
| Less focused on market structure | Helps identify important price zones |
This disparity is crucial for traders because price points with high participation frequently turn into locations that the market responds to in subsequent movements.
How Does Volume Profile Work?
Volume Profile is generated by evaluating the amount of traded volume at each price level during the preset price ranges. Rather than gauging potencies according to time, it gives the results as a volume distribution that reveals what prices solicited most trading activity. The chart data are generally presented with horizontal bars adjacent to the price levels:
- Big bars inform about the volume of trades that were made at that price.
- Small bars inform about the less volume of a particular price level.
- The traders utilize such distributions for determining locations where the market accepted the price and places where it moves swiftly. The key elements involved in the Volume Profile are:
- Volume at Price
- High Volume Nodes (HVN)
- Low Volume Nodes (LVN)
- Point of Control (P.O.C.)
- Value Area High (VAH)
- Value Area Low (VAL)
Volume at Price
Volume at Price refers to the total traded volume at each level of pricing. This is the basis of the Volume Profile analysis. While conventional thinking in trading evaluates the amount of volume produced during a certain timeframe, traders instead analyze the volume exchanged at certain prices.
For example, when a stock price fluctuates between $95 and $100, the Volume Profile will show whether trades predominantly took place at $96, $98, or $100 creating an important area of interest for traders.
High Volume Node (HVN)
A High Volume Node (HVN) can be defined as the price range characterized by a high amount of trading activity. In general, HVNs may be thought of as the prices traders are willing to enter the market at.
Some traders also compare HVNs with order blocks to identify areas where institutional activity may have occurred. HVN characteristics include:
- Strong market acceptance
- Increased liquidity
- Slowing speed of price movement
- Support or resistance zones
When the price approaches an HVN, traders follow the situation in terms of whether the market still supports prices at the node or not.
Low Volume Node (LVN)
Low Volume Node (LVN) is the price zone in which trading activity is low. Low Volume Nodes in contrast to High Volume Nodes indicate price movements that occurred quickly as neither buyers nor sellers wanted to linger in this zone for long. The importance of LVNs lies in the fact that the price makes fast moves.
To illustrate, should price come out of an LVN without resistance, it would be because most traders have not taken positions at that level.
Point of Control (POC) for Volume Profile
The Point of Control (POC) refers to a volume profile point where a maximum amount of volume has been traded. Although Market Profile and Volume Profile employ the term POC, both have different methods of calculation.
- The POC of Market Profile = price level with maximum time.
- The POC of Volume Profile = Price level with max volume.
The POC of Volume Profile is often treated as a very important level for traders as it provides them with a point of major transactions.
Value Area High (VAH) and Value Area Low (VAL)
The Value Area means the price range where the majority of trading volume happens. It consists of two boundaries:
- Value Area High (VAH): The price level of the highest price in the value area.
- Value Area Low (VAL): The lowest price level in the value area.
So once the market breaks out of the Value Area the traders analyze whether the market will:
- Accept the new price and create a new Value Area.
- Reject the breakout and come back into the range.
Market Profile vs Volume Profile: Key Differences
Market Profile and Volume Profile are usually discussed together, but they rely on different concepts and provide answers to various questions regarding market conduct. Neither tool is more effective than the other; they merely deliver different viewpoints that provide traders with additional information to make more informed decisions.
The main difference between the two tools is the type of information they analyze. Market Profile looks at the time spent at the given price level, while Volume Profile looks at the amount of volume traded at the given price.
This difference makes traders perceive support and resistance differently, identify value areas, and recognize possible investment opportunities. The table below summarizes the differences between both tools.
| Feature | Market profile | Volume profile |
|---|---|---|
| Primary focus | Time spent at each price level | Trading volume at each price level |
| Core data | Time Price Opportunity (TPO) | Volume at Price |
| Main objective | Understand market structure and price acceptance | Identify Forex liquidity and high-activity price zones |
| Point of Control (POC) | Price with the most TPOs | Price with the highest traded volume |
| Best suited for | Market context and auction analysis | Support, resistance, and liquidity analysis |
| Common users | Auction Market Theory traders, futures traders | Volume-based traders across multiple markets |
| Strength | Reveals balance and market behavior | Highlights areas of strong participation |
Market Profile vs Volume Profile: A Practical Comparison
For example, EUR/USD is currently trading at 1.1500. The questions which will come into a Mind of the Market Profile trader will be the following:
- Does the market accept this price?
- Is there a rotation around fair value?
- Is the market balanced, or trending?
As you can see, the Market Profile trader analyzes time. A Volume Profile trader, looking at the same setup, will ask other questions:
- Was there a high volume at 1.1500?
- Is this price attracting market participation?
- Can this price serve as support or resistance in the future?
The Volume Profile trader looks at the volume. Even though the result will be the same for both traders, the rationale will be different.
Market Profile vs Volume Profile: Which One Is More Accurate?
This question is one of the most common for traders, but it is impossible to give a universal answer. The thing is that Market Profile and Volume Profile tools are aimed at the analysis of different market aspects and thus accuracy depends not on the tool but on the trading purpose. For instance:
If your purpose is to get information about market structure, acceptance/rejection zones and market auctions then Market Profile can be more useful. If you need to find out high-liquidity zones, volume clustering and significant levels of trading interest then Volume Profile will do better.
Quite often professional traders use both approaches as they complement each other and do not compete.
Advantages and Disadvnatages of Market Profile
Market Profile became a widespread approach used by traders since it allows understanding how the market works and does not just demonstrate the movements of prices. While Market Profile has its advantages, it also has several disadvantages. Some of its main advantages and disadvantages are listed below:
| Pros | Cons |
|---|---|
| It gives you the picture of market structure as a whole. | It is relatively difficult for novices to learn. |
| It helps to identify acceptance or rejection zones. | Reading profile structures needs practice. |
| It makes it possible to understand whether the market is balanced or trending. | It cannot be used alone for trading purposes. |
| Provides better analysis within context rather than just focusing on candlesticks. | Various settings for sessions can lead to different profile structures. |
| Assists in making decisions when used together with price and order flow analysis. | It is best used in combination with other technical tools. |
Advantages and Disadvantages of Volume Profile
Volume Profile is considered useful as it highlights where actual trade took place and where price levels, which might not be seen in regular charts, can be discovered by traders. As with any analysis technique, there are also certain drawbacks to the Volume Profile. The benefits and drawbacks of using volume profile are:
| Pros | Cons |
|---|---|
| Identifies liquidity zones. | The accuracy of its application is contingent upon the quality of volume data that can be gathered. |
| Aids in finding zones of breakouts and reversals. | Tick volume data is usually utilized by traders in the decentralized markets like Forex. |
| Can help improve entries when combined with price action and chart patterns. | A high volume area does not necessarily lead to a price reversal. |
| Useful for all instruments such as futures, stocks, cryptos, and Forex (with volume data). | Volume clusters can be erroneously interpreted by beginners without taking into account the wider picture. |
| Marks high volume price areas which may serve as support or resistance levels. |
Which One Should Traders Use?
The question about the suitability of either Market Profile or Volume Profile for trading cannot be answered directly. The choice of the proper instrument depends on the trader’s approach to trading and desired type of market information to obtain.
In case your main aim is to get knowledge about how market is building up over time, determine the fair value and see which players dominate in the trade – buyers or sellers – then Market Profile will be more appropriate for you.
It gives a lot of helpful information about the market construction and is used widely by traders who apply Auction Market Theory. However, if your task is to discover high-volume areas and liquidity zones and find possible areas of support or resistance, then Volume Profile can be more convenient for you to use.
These two profiles are not alternative instruments and skilled traders use them both in combination since they give different but complementary information.
When to Use Market Profile
Market Profile will be useful for you when you are analyzing market actions rather than price movements. This tool will suit you well if you need to:
- Assess whether the market is range-bound or trending.
- Spot price levels where price acceptance and rejection occurred.
- Determine the true value of the market.
- Enhance intraday market structure analysis.
- Use Auction Market Theory in your trading.
Since Market Profile considers the time spent at each price level, it can help traders figure out how the market has formed, and not just where the market has traded.
When to Use Volume Profile
Volume Profile would be preferable if the trading decision relies heavily on market participation and liquidity. You will find Volume Profile more useful if you need to:
- Spot high-volume areas of support and resistance.
- Spot levels where institutional activity might have taken place.
- Assess liquidity prior to entering a trade.
- Spot breakouts with the help of volume concentration.
Many swing and position traders will agree that Volume Profile offers additional information regarding where there was substantial buying or selling interest in the market.
Can You Use Market Profile and Volume Profile Together?
Sure. Actually, many professionals use both these tools together as they analyze different aspects of the market. One way to do so would be to use Market Profile for market structure analysis and identification of areas of value, followed by confirmation through Volume Profile that those levels have substantial volumes.
For instance, if Market Profile suggests a breakout from the Value Area and Volume Profile indicates increased participation at similar levels, it will mean that traders might have more confidence in such a breakout because it is confirmed by market structure and volume.
Though the usage of both Market and Volume Profiles does not ensure success of the trades, using two methods of analysis together provides a trader with a more holistic picture than using only one of them.
With STP Trading, you can choose from multiple trading accounts designed for different trading styles, access the powerful MetaTrader 5 platform, and benefit from competitive spreads and fast execution.
Create your STP Trading account today and start applying Market Profile and Volume Profile in real market conditions.
Frequently Asked Questions (FAQ) on Market Profile vs Volume Profiel
What is the difference between Market Profile and Volume Profile?
Market and Volume profiles differ in the type of data that they use. While Market Profile uses Time Price Opportunity (TPO) to measure how long the market stays at certain prices, Volume Profile uses trading volume at those levels.
Which One is Better: Market Profile or Volume Profile?
Neither one can be considered objectively better in all cases. Usually, Market Profile is chosen when working on market structure and Auction Market Theory, whereas Volume Profile is frequently employed to detect areas of high volume, liquidity and possible support/resistance. Both methods are used by professionals in combination due to their compatibility.
Is it Possible to Work With Volume Profile in Forex Trading?
Of course, but there is one caveat. Since Forex is a non-centralized market, there is no way of knowing what is the volume of trade. For this reason, most Forex brokers use tick volume in their terminals. It means the number of price movements, not traded contracts. Even though tick volume cannot be treated as a true volume, some traders find it useful enough for their needs.
What is the Point of Control (POC)?
Point of Control (POC) is the price level having the largest volume of activity within a certain time frame. For Market Profile, POC is the price level where the market spends most of its time. For Volume Profile, POC is the price level where the largest trading volume occurs. Since the two tools have different methods of calculating POC, the POC price level might not always coincide between the two profiles.
Can novices use Market Profile?
Yes, but it requires practice. Market Profile involves new ideas like TPOs, VAs, and Auction Market theory which is not common in the usual candle stick analysis.
Is it possible for traders to use Market Profile in Forex trading?
Indeed, traders are able to employ the Market Profile in the process of Forex trading, especially for those market participants who are interested in the price acceptance and overall structure of the market.
Does Volume Profile play a role in day trading?
Certainly, Volume Profile is an effective tool used by day traders since the method delivers useful information about crucial price levels to be reached during the trading day and price levels with the most volume trading activity.
Is Volume Profile usable by beginners?
Yes, beginners can use Volume Profile as long as they possess the knowledge and understanding of its basics before implementing it in real trading. Knowledge of such terms as Point of Control (POC), Value Area, High Volume Nodes (HVN), and Low Volume Nodes (LVN) is essential to the appropriate understanding of Volume Profile charts.
Is Volume Profile an indicator?
Volume Profile is treated more as a tool in technical analysis instead of an indicator in traditional sense. As opposed to popular indicators like moving averages and RSI, which calculate values based on time, Volume Profile does the job of sorting the trading activity according to prices.
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