As a stock market trader, the volume profile is a tool you absolutely must become familiar with if you want to improve your trading strategy, get better entries & exits, and gain insight on the future movement of stocks you plan to trade. The volume profile will show you key areas that buyers and sellers have stepped in on, as well as entire ranges where they haven’t been interested. The areas that swell the most with price action are referred to as volume shelves, and they often act as support and resistance. The areas between those volume shelves that are lacking in volume are referred to as volume gaps — just like overnight gap-ups and gap-downs, these have a tendency to act as a magnet, getting “filled” during periods of price discovery. The price where the most trading activity has occurred in totality, called the point of control, is also keenly important to this strategy — used as a level of support and resistance just like volume shelves. Below, we’re going to walk through three different charts, and analyze what the volume profile is telling us.
What is the Volume Profile?
In trading, volume profile is one very powerful metric to monitor. The volume profile is a representation of market liquidity and trading volume at particular prices. Instead of measuring a stock’s moving over time, the volume profile measures trading by price and quantity. Commonly, key levels of support and resistance can be determined by notating where the outermost points of these volume “shelves” lie.
What is the Point of Control?
Perhaps most important to this strategy is a level called the point of control. The point of control indicates the price level where the most trading activity has occurred. These levels often correlate to other notable areas of support and resistance on the chart.
One can map out these points of controls and volume profiles over specific timeframes using a TPO chart to track the movement of each daily “point of control.” TPO charts can give greater insight into whether a trend is bullish, bearish, or neutral, as well as where the majority of buyers and sellers stepped in during a specific day or time frame. If a TPO chart shows the point of control consistently rising, that’s a bullish signal. If a TPO chart shows the point of control consistently falling, that’s a bearish signal. If a TPO chart shows a point of control that is largely stagnant, it could be a sign of the significance of that price level to that particular stock — indicating that you should take a “wait and see” approach to determine whether price action eventually rejects or bounces from that area.
Now, this is a brief overview of volume profile and point of control, but let’s see it in action, starting with Amazon.
Amazon Hits a New 52-Week High — How to Trade it Using Volume Profile & Point of Control
Amazon buyers are feeling good lately, as the e-commerce titan continues to break to new 52 week high after new 52 week high. But what’s the next step? For those who traded Amazon back in 2021, you know that once upon a time Amazon presented a double top at what was roughly the ~$3770 level pre-split, and is now the $188.65 all-time high. Between Amazon and that all-time high lie one very important level, and as of right now, we’re sitting right at it. That level is a massive volume shelf and the volume area point of control.
As we’ve said, volume shelves can act as significant points of support and resistance, indicating where potential liquidity lies underneath the surface of the market. And these volume shelves and points of control often align with other key levels when performing technical analysis on a stock’s chart.
Notice that the point of control here is not only exactly where we are trading now at roughly $159.50 — it correlates to the neck line of the previous double top. The neckline is the “bottom” of the range in between the double top. Following that double top, this former support flipped to becoming resistance for this e-commerce titan, and hasn’t been retested since April of 2022. So in this case, we have multiple types of resistance working against a powerful uptrend in this name. So, how do we trade this?
How to Trade Amazon Using Volume Profile
First, what you would do if you had already been in this trade for a period of time, and it were going well, is that you would absolutely consider trimming or rolling your position here to lock in at least some profit. We haven’t retested this area in a long time, and it’s significant resistance for multiple reasons, so it would not be surprising to see this level get tested a bit before we can pass through.
That said, one event on the near-horizon could help us do that — Amazon’s earnings. Amazon’s earnings could provide an opportunity to break us higher and clear the runway, but I wouldn’t get in for a position there unless we are already trading firmly above this level, using the point of control as a stop-out level. If earnings send us lower, that’s okay too. It would be only the first test of this resistance in recent times, and momentum like this isn’t likely to break down over a single red week.
So, how would you trade Amazon using volume profile right now? If you’re looking to get in, rather than entering a position right now, you could consider looking for a daily or weekly candle close above the point of control for a bullish entry trigger using at the money options and something like a one-month timeframe, using that point of control as your stop out level (a daily or weekly candle close below that POC to be specific), the $174 level as your “roll” or “trim” level (the area at which you would consider taking some risk off the table, perhaps by spreading your trade, perhaps by rolling your strike higher and pocketing the difference, perhaps by selling half of your contracts if you’re in more than one), and you would ultimately want to consider taking full profit a couple of ticks beneath that all-time high. That doesn’t have to be the end of your trade in Amazon, it’s just that you would want to first see how the stock reacts to this former top, looking for yet another breakout (a new ATH) before getting back involved a second time.
Let’s look at another instance of how we can use volume profile to trade, using Intel.
How to Trade Intel Using Volume Profile Gaps
Following their recent earnings, Intel’s stop dropped 11.91% in a single day — it’s largest one-day drop in over two years. But where did it stop? The bottom of a volume shelf. Look at how well the price aligns below to the trading activity of Intel. Note the period at the end of December where Intel reversed directly at the top of the volume shelf. Note the massive gap below where Intel trades currently, and how well that next lower volume shelf aligns with the top of a former balance range Intel had been trading in.
For even more confluence of how well the bottom of this volume shelf aligns with Intel’s areas of support, take a look at this monthly chart Intel, where the same area we’re at now aligns cleanly with an area of support over the past 6 years.
How to Trade Intel Using Volume Profile and Volume Gaps
When we look at Intel’s price action, we see a stock that has been a textbook “value trap.” That’s a stock that appears to be trading at a great price relative to its valuation, however never actually provides outperformance to investors who buy in. Notice that since 2018, the price of Intel is effectively unchanged. Intel even traded at this value for a period back in the year 2000. And even recently, when looking at the first chart we focused on in Intel, it wasn’t outperforming its semiconductor peers. So while this may look like an attractive trade to make for a bullish bounce, the more compelling trade here is to ride the momentum lower — if we break below the current volume shelf support at roughly $43.50
Seeing a daily or weekly candle close below that level would indicate a technical break in Intel, and given that there’s also a massive volume gap lying in wait, it’s likely that we would be quickly dragged lower to the top of the next volume shelf, located around $38.50. Because the point of control is significantly lower (around $29), that isn’t as relevant to us right now — however, if Intel were to cruise through that entire volume shelf, this point of control likely would come into play.
In short: If Intel breaks down and closes below $43.50, consider following the bearish momentum with short-term (two week) expiring at-the-money options, with $38.50 as a potential price target, and $43.50 as a “stop-out” level.
Now, let’s look at one more instance of this to drive the point home, in the biggest ETF: The SPY.
What the Volume Profile Tells Us About the SPY
The more you look at these volume profile charts, the more you’ll start to notice confluence with volume shelves and significant levels in the stock. By practicing with the volume profile tool, you’ll become more comfortable with making assertions about future price activity based on where in the map they lie. Notably, volume profiles allow you to select candle timeframes in order to gain a better idea of what levels traders in recent history care about. The volume profile below uses the last 1,000 daily candle closes.
We see that here in the SPY. Note the former high aligns well with the top of our nearest volume shelf. That shelf has a small gap before filling in once again at the bottom of that most recent balance range. In other words, most of the trading in the SPY between mid-December and mid-January took place at the outer edges of that balance range — not the middle. If we were to pan back in time, we would see that the volume shelf we notice now also aligns with the former all-time high set more than two years ago. Why do we point that out?
Confluence, confluence, confluence.
In technical analysis, the best trade ideas will feature multiple “reasons” why they might work which all align together. When we see that the former all-time high is at the top of a recent balance range, and was resistance for the SPY for a long time, we know the stock market cares about it a lot. We have finally broken out from that resistance, but the work here is likely not over. That’s because in order to “validate” the flip from resistance to support, a stock often must successfully retest that level. In a successful retest, the SPY would fall back from where it is now to trade at or near $480, and then bounce higher from that level.
Given that the recent breakout to all-time highs has now extended to roughly the same percentage width as what we saw inside the balance range (a doubling of the range is often what traders look for when mapping out balance range breakouts and breakdowns), it would be reasonable for the SPY to turn back from here and retest that upper volume shelf and former resistance.
That said, when looking at how to trade the SPY using the volume profile, we have to keep one thing in mind:
The SPY is in a very bullish trend. Over the past 13 weeks, the SPY has risen for 12 of them. So attempting to “call the top” here and short the SPY down to that $480 resistance is likely a larger risk than the reward is worth, especially because we don’t have any “stop-out” areas up here. In other words, if you were to short the SPY from here, how will you know when you are wrong in the trade? You really won’t because there is nothing above these levels.
Instead, the best idea would be to watch for a retest of the $480 price level (just a few cents above the former all-time high and key psychological resistance), or even the top of that balance range at $478 for a successful retest. In the event that the retest takes place without a hitch, the SPY bounces from that level and shows a convincing daily candle close, you would then consider getting in for a bullish continuation higher. You would likely consider rolling or trimming your position at the current high $489 in case this area turns into another balance range, however you would want to leave a bit on the table in the event that we continue to set higher highs and higher lows — which is what a trip back to $480 followed by a bounce would indicate. Not for nothing — higher highs and higher lows are how the SPY has been trading during the entire quarter.
Conclusion: Volume Profile as a Trading Tool
Hopefully by looking at these charted examples, you’re starting to get a feel for volume profile. Once you practice a bit, it will become second nature to you — while it may look complicated at first glance, it’s really no more complex than reading a simple candle chart. You’ll start to notice volume shelves and points of control that align well with other appetizing levels. You’ll start to see what often happens when stock price breaks into a volume gap. You might even decide to pull up a TPO chart for more fine-tuned short-term trades and trend analysis.
Understanding something like the volume profile will help expose you to more trading opportunities, help you to find better entries and exits, and ultimately, it will help you to trade smarter.