Upbeat music plays throughout.
Narrator: If you trade with stock charts, you're used to seeing volume at the bottom showing you when shares were traded. Volume Profile is a technical indicator that shows where, or at what price, volume occurred. It's like taking the volume indicator off the X-axis and putting it on the Y-axis, letting you directly see how volume matches up with price.
Analyzing patterns in these areas of supply and demand can help traders identify support and resistance and potential buy and sell signals. I'm going to show you some of the ways traders find these signals for short-term stock trades using the thinkorswim® desktop platform.
Let's get started with an example of how to add the volume profile to a stock chart.
Animation: Starting on the thinkorswim Charts tab, U, N, H is typed in the symbol look up box.
Narrator: First, I'm going to pull up a chart for UnitedHealth (UNH). This isn't a recommendation, just an example.
Animation: The mouse selects the D menu to change the timeframe.
Narrator: In this video, we'll focus on short-term trading so I'm going to change the chart to five day, five minutes.
Animation: In the Edit Studies and Strategies window, "volume pro" is typed in the search box. The volume profile indicator is selected from the list.
Narrator: Next, I'm going to add the indicator by clicking on the studies icon. While I'm here, I'm going to make some adjustments for short-term trading.
Animation: The volume profile gear icon is selected. The price per row height mode is changed from Automatic to Ticksize. The time per profile is change from Chart to Day. On expansion is changed from Yes to No. The mouse then selects Apply and OK.
Narrator: I'm going to edit the study to get more data by focusing on ticks. Then I'll create a volume profile for each day on the chart. Finally, we can overlap the profile with the price to get a different look at support and resistance.
Now, hang with me while I pull up the day I want to use for the example. I'll click on the thinkorswim platform OnDemand feature that allows us to see a previous market day as if it were real time. I'll change the date to January 17, 2025, at 10:45 a.m. I'll zoom in by going to a one day, one minute chart.
We're finally set up, so let's break down the indicator. Each bar is called a node and it tells you the number of trades taken at certain price intervals over the trading period. We set up the chart so that these nodes are generated by overnight and day trading sessions. The nodes create patterns that can help investors identify what types of trades to make. UNH is a symmetrical pattern because the bars have similar length and spacing above and below the red line.
The red line is the point of control, or POC, which is the "fair value" price. This isn't the same as what fundamental analysts call fair value, but it's the price that has the most volume, suggesting it's the price that the majority of traders think is the best price for that time.
The shaded space above and below the POC, and between the two yellow lines, is known as the value area. The default in the thinkorswim platform includes 70% of the trades. The upper yellow line is the high value line. When price is up here, the stock may be considered overvalued, which can act as resistance. The low value line suggests the price is undervalued, and may act as support.
UNH rallied on the open, which is where the shading changes at the vertical line. The price ran up to the upper value line around $520 and appeared to bounce off resistance, which some traders see as bearish signal.
Traders expect the point of control to act as a magnet that pulls the price. When the price moves away from the POC, the expectation is that price will eventually move back to it.
Here's something to consider before we talk about our example trades. First, many traders avoid the first hour of trading because it tends to be volatile as new orders pour in and are filled. Our example picks up about 75 minutes after the open.
To take this hypothetical trade, we could short shares of UNH and set a target price at $515, which is the POC. The lower level of $508 could also be a target, although there's a lower likelihood of the price hitting it. We may also consider an exit above the high value point as a way to cut losses if the stock rallied.
I'll move the time up an hour. UNH went the wrong way by rising to $521.85. A trader may close the trade here for a loss depending on their trading plan. Notice that POC is $3 higher at $518. It's important to remember that as the trading goes on, the POC and value areas will shift. However, that doesn't necessarily mean you have to change your targets.
Moving forward again, UNH fell to the original POC at $515, which is one potential exit signal.
Skipping forward near the close we see UNH didn't quite make it to the lower $508 target in that trading session, closing just below $511.
So, trading the symmetrical pattern is all about waiting for price to go back to the average. Of course, there's no guarantee that the price will revert, which brings us to some other volume profile patterns.
I'll go to Tesla (TSLA) for a trending pattern. Once again, this is not a recommendation. The stock rallied in premarket trading on January 15, 2025, creating an uptrending p-pattern. A bullish "p-pattern" can occur when a stock rallies and then consolidates. The opposite is a bearish "b-pattern," where the stock may selloff and consolidate, making a small case "b."
Animation: An Entry pin is set at $412.50 marking a higher low in the price. Then it's replaced with a new Entry pin at $414.23 marking the price breaking above the upper value line.
Narrator: If we were to enter a hypothetical trade, we might choose to buy after Tesla created a new higher low or after a breakout above the upper value line.
Animation: The previous day's high was at $422.64 which is marked for a potential exit signal.
Narrator: For potential exits, we could expand the chart to five day, five minutes to see potential resistance lines. We could also put some kind of loss exit around the lower value line.
Tesla rallied throughout the day causing the POC and value areas to move higher as well. It also moved past resistance set a couple days ago.
Animation: The chart changes to the next day where the price fell from the previous day's high of $429.80 to $413.15.
Narrator: However, if we didn't plan an exit, we may have given up the gains the next day when the price fell again.
The Volume Profile allows you to identify the price where investors see value. There are other ways and patterns you can learn to trade. Consider practicing with the Volume Profile using the paperMoney® feature on the thinkorswim platform before adding your own money to the volume bars.
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