The power of Point of Contact and Volume Profiles

The power of Point of Contact and Volume Profiles

May 31, 2020 | 0 comments

No matter what type of asset you decide to trade, a well-founded set of trading strategies and a solid money management system are key ingredients to a consistently profitable trading business. And in order to establish a well-founded strategy, many traders rely on fundamental analysis, technical analysis, or a combination of the two. 

POC or Point of Control serves as an element of technical analysis. It is a Market Profile concept used to describe the price at which the highest volume of an asset was traded during a specified period at certain price levels. 

Before we go into the importance of considering POC as part of your strategy, let’s talk about volume. 

You know those colorful bars to the right of the chart next to price levels? Those bars indicate the traded volume amount of a certain asset over a specific period of time. The indicator takes the total past traded volume at a specific price level, in a determined time period, and divides the buys and sells volumes and shows the data in the vertical axis of a histogram. The longer the bar, the more trades transacted at that price point. Traders can rely on volume profile indicators as one of the most powerful tools in their shed.  

There are several kinds of volume profiles:Visible Range (VPVR), which shows the volume traded in the price level from the candles shown on screen. Changing price action’s time period, results in changes in the volume profile visible range; Fixed Rage (VPFR), which allows you to define the start and end point of a time period and see the volume profile within that time; and Session Volume (VPSV), which shows the volume profile for the sessions shown on a chart.

The highest volume node on the volume profile, indicating the highest activity around a price level, is the Point of Control, and it is used by traders as a support and resistance point. These high volume nodes indicate the fair market value of the asset. Price tends to come back to previous POC levels because of the high amount of activity that takes place at these high volume nodes, however, price rarely breaks past a previous high volume node, making it the ideal level at which  to place stops or entry levels for a trade. Because of the high level of buying and selling that take place at this point, price tends to remain at this level for a long period of time. Once the price of an asset nears a previous high volume node, price is likely to begin moving sideways for a period of time depending on market conditions and the constructive nature of the Market Profile.

POC is not only easy to determine (just look at the row at which the most number of TPOs occurred), but it provides a very useful indicator of where price may go, as opposed to many indicators which predict the price movement as it is happening, so get friendly with volume profiles and incorporate them into your trading strategy. 

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