A Richer Technical View: Analyzing Volume by Price

August 28, 2023 Advanced
The thinkorswim® Volume Profile study helps traders analyze volume by price. Learn more about this tool and how you can use it to identify dynamic support and resistance levels.

Investors often look at how much volume a stock is trading at for insight into how other market participants view the distribution and changes over time. The thinkorswim® trading platform gives investors a unique way to visualize price action while also shedding light on support and resistance.

Plotting price and volume

The Volume Profile study displays trading activity over a specified time period at specific price levels. Unlike a typical volume study that aggregates volume for a specified time period and displays a vertical column for that time period's total volume, the Volume Profile study plots a horizontal histogram of volume traded at specific prices.

The widest horizontal row of the Volume Profile defines the specific price when the most volume has traded over the specified time period. This specific price is referred to as the point of control (POC). The range of prices around the POC that contain 70% of total volume for the period is called the value area.

The image below shows an example of the POC and value area of the Volume Profile study applied to stock XYZ on a year-to-date chart. The POC is highlighted by a horizontal row at 3984.75; the value area is highlighted in the yellow region between 3770.05 and 4159.83.

Volume by price on thinkorswim

Image shows the POC highlighted by a horizontal row at 3984.75 through a wide value area.

Source: thinkorswim platform

For illustrative purposes only. Past performance does not guarantee future results.

To apply the Volume Profile study, log in to thinkorswim and select Charts > Studies > Add Study > All Studies > V-W > VolumeProfile.

Reading a volume profile chart

Analyzing the Volume Profile study is a bit different from classical technical analysis. Let's walk through a couple hypothetical scenarios.

Let's look at a scenario where stock XYZ recently rallied up to new highs, above the value area high at 4159.83, meaning stock XYZ is trading above its value area. This is typically bullish, but that's about as much as you can conclude from this observation.
From here, stock XYZ could spend more time near its highs and build more volume at prices above 4159. This could eventually lead to the value area shifting higher, particularly if the stock starts trending higher.

But what if stock XYZ starts to pull back?

Support should materialize on the first test of the value area high at 4159.83. In this case, the Volume Profile coincides with the previous highs. Technicians would expect this old resistance to act as new support, and the Volume Profile appears to be confirming this. However, there's no guarantee that the levels of support will converge.

What happens if the stock experiences a deep pullback and falls back below the value area high? This is where the POC at 3984.75 could come into play. It's possible if stock XYZ were to fall back into the value area, it'd keep going down to the POC, or even lower.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

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Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.