The BEST Trading Indicator

In this video I will show you probably the best trading indicator out there. And it's not one of those technical indicator like rsi, macd, blah blah blah. It's literally the money indicator. And this indicator is called the volume profile. And it's actually showing you where most money in the market was trading a lot. Most retail traders use normal candlestick and price action concepts like higher highs, higher lows, support and resistance and the classic stuff you find on the online retail trading space. But in the professional worlds, in hedge funds, in the floor of world champions, they use these type of indicators and for good reasons. Because if you use this indicator correctly, and we're going to learn how in this video, it can allow you to truly follow the smart money on the charts. And what are the actual areas where they pour in a lot of money that eventually moves Price action. So for all of those who are kind of not into indicators, price action is more of an indicator than volume. Volume is what drives price. So you could consider it some sort of leading indicators towards price. In this video I'm going to teach you all the basics on what the volume profile is and how to use it in a very simple way to apply it right away in your trading and see some radical improvement in the way you open your trades. You find areas and your overall trading performance. So let's get started. So this is how a volume profile looks like. It basically show you at every level of price how much volume of transactions happened in the marketplace. And we define a transaction simply as a buyer being matched with a seller. Okay, so volume profile shows you the distribution of trading activity inside of a session. For example, this is a daily volume profile. You could use a weekly volume profile. You could use a 1 minute volume profile so you can see the distribution of trades inside of any time frame you want. And what you will notice is there's going to be a lot of areas with big volume and a lot of volume and areas with lower volume. And this is the main thing we want to take a look at high volume areas and low volume areas. So you have areas with high distributions of volume and areas with small distributions of volume, which means that a lot of trading happened in these areas and less trading happened in these areas then these levels where there's a lot of volume, specifically in a few levels of price. We call these high volume nodes or hvn, the areas where there's a little less volume and you have these valleys compared to these peaks in volume. These valleys, we call them low volume nodes. High volume node, A high volume Node, a low volume node. This is another low volume node. This is a high volume node. This is a low volume node. Another low volume node. This is a big, high volume node, high volume node. This is clearly a valley because you see volume decreasing. So this is a low volume node. This is a high volume node. Again, another one over here, another one over here. And then you have ultimately the lower in the lower area, another low volume node. So this simply means there was a lot of trading over here. There was a lot of trades taken also by big institutions, and there was a lot of exchange of contracts. A lot of trading activity from both sides of the market, from the buying side and from the selling side. When you see low volume nodes instead, this basically means that there was few trades happening there. Right? You didn't have a lot of buying pressure and a lot of selling pressure. Typically what you have in the low volume nodes is one side of the market is exerting a much harder pressure on the overall auction of the overall price compared to the other one. So low volume node are, let's say, the more directional sprints of the markets. So if you have to kind of visualize it on a price action level, this type of volume distribution, where you have low volume here and then a lot of volume here, a lot of volume here, will probably something like this price going down really fast, especially here, right? Not a lot of retracements going on. And then when we start having this big volume areas, you'll see price spending a lot of time there. Right? Because when a lot of time is spent, a lot of time is being spent there, trading, exchanging a lot of contracts and stocks and cryptos, whatever it is, then you have a slightly lower volume here. So you're probably going to have a phase of expansion, typically, and then a lot of volume in this area. So a lot of time spent here as well. So all throughout this area, you'll typically have a lot of price action. And instead you're not going to have a lot of price action having gone on the lower area where there's lower volume. So typically you're going to see both. You're going to see when there's a lot of volume, there's typically a lot of price action. When there's low volume, there's less price action. So how much time is spent on a specific range typically determines also how much volume is traded at that specific range of price. And as you can see, we have this different coloring between this gray area and this yellow area. Well, this differentiation is based on a statistical Concept called the normal distribution or the Gaussian distribution, which is something some of you guys might have learned at school, some of you might have not. But put it very simple terms, when you analyze a sample of data, typically throughout several observable phenomenons, and let's say these are some numbers that you can quantify somehow they will tend to fall under this type of shape, this type of bell. The classic example I make is with the length of penises. So the distribution of a population's penile length will also fall under a very similar curve where on this axis you have penises of the length of 6cm, 7, 8, 9, 10, blah blah, blah, up to 18. So for example, you're going to have very, a very low amount of people with a penis shorter than 10 cm, very few people with a penis above 15 cm, and most of the people being in the average range between 11 and 14. Or in the distribution of height of males in a population, you can see there's a lot you can see most of the people are going to fall under a height between 160cm to 175 approximately. Very few people are going to be in the lower percentiles, so in the very short people and very few people will be in the highest percentiles where people are really, really tall and going to the 6 foot 4 heights. So the same concept can be applied with volume, where you have a lot of volume traded at these prices, less and less volume traded at upper prices, less and less volume traded at lower prices. So the normal distribution of volume in this specific sample falls under this range of price. So statistically speaking, everything that falls under this range is considered normal. Anything that happens outside in the outer percentiles of our statistical distribution is to be considered somewhat an anomaly. Just like a super tall guy or a super short guy are anomalies, trading activity happen at upper prices and or at lower prices compared to this distribution is to be considered some form of a statistical anomaly inside of that session. And so what you typically see is 68% of the samples that we take into considerations, 68% will fall under one standard deviation. Okay, this is a negative and a positive standard deviation. 95% of the samples will fall under the second standard deviation, negative standard deviation and positive standard deviation. And 99.7% of samples will fall under the third standard deviation, either negative or positive. So what we typically plot inside of a volume profile distribution is the first standard deviation only. So where 68 more or less, we typically rounded up to 70%. This is where 70% of the volume was traded throughout that session. So let's imagine a profile where this is the current distribution and this is the standard deviation. Well, it means that most of the money was traded inside of this area. So anything that happens outside is to be considered an anomaly that could revert back to the mean. So whenever, for example, we are inside of a volume range, one of the very common type of trading that we can look for is reversal trading and range bound trading setups where we basically sell the tops and buy the bottoms whenever we go outside of the first volume standard deviation. Because we both have the statistical reference of anything that happens out is an anomaly, statistically speaking. But aside from statistics alone, we also know that compared to the distribution, these are cheap prices where smart money could buy. And these are premium price. Smart money would prefer to sell where it's more likely to see aggressive sell activity or aggressive buy activity, pushing the auction back in a situation of balance and maybe target the highest volume areas as a very probable target or the other side of the distribution. So for example, when we see a breakout that fails, we call this a failed auction. We might, for example, want to buy here with a stop loss below here, targeting either the other side as a take profit, or if you want to be more conservative, targeting the point of control or the highest volume node inside of the distribution as a take profit. And these are all trading setups that can have a very decent win rate with typically a high risk to reward ratio. Another way you can trade these is trend following. So let's say before there was a distribution of price here that created a lot of volume, okay? Whenever you see a new distribution of price happening above the previous one and a big chunk of volume being traded at higher prices than the previous biggest chunk of volume, that's when you can qualify that we're in an actual trend, not just using price action like this, okay? With highs and lows that can be momentarily breaking out, but then breaking back in and then creating, you know, all of these fake outs. Well, just take a look at where the total distribution is. Fuck these anomalies. And let's trade it. When we have a serious breakout, right? And we see volume breaking out, not just the high, but the whole range moving up because that's where the money is, that's where most of the money is being traded. So we want to follow the money. So whenever this happens, you can either buy over here to have even a higher risk to reward or wait for a very strong breakout that spends some time outside. Enter on the test Stop loss under the main high volume node. And that's also a very high win rate, high risk to reward type of setup. So this is all the basics on what it is and already a little hint on how to use it. But of course you're going to ask yourself, where, how do I get this type of indicator? Where can I find it? And the truth is you can find some free versions of this online. So one option you have is to go for Trading View's volume profile indicator. So you look for volume profile and you have the session volume profile, which is something you need to pay for by the way, is not included in the free version of it. And you're going to get a first level of volume profile. Let's go on the future contract. And yes, as you can see, we have a daily version of the volume profile. But the problem with these volume profiles is they're a little bit weird. They're not based on actual trading data. They're based on something called tick volume, which is a very rough approximation of actual trading volume. Plus they are grouped in a weird way that personally I don't really like. You can kind of customize it, I think with the row size and stuff like that. But the problem with these type of volume profile is they're a proxy of real volume. You could use them. I personally don't because for my trading I want to access real data and if I have to pay for it, I might as well just go for the real deal, which is, for example, what we have on deep charts. And on deep charts, if you open a new price chart and select for example the S&P 500 or anything else here, you not only get a normal price action chart, but you also get real volume from the exchange, which requires more powerful computational data this platform provides, which is also why it's a desktop type of platform, because this data is processed mostly by your GPU or cpu. So I can right click on my chart, go on indicators and search for deep profile. And I have a lot of them. I will just add the deep profile and you can start seeing it now on the screens. And this is going to be based on the actual volume from the exchange. So let's kind of compare it to the normal type of volume profile and see if there is any difference. Let's put this one here and let's put this other one over here. We have to connect to the data feed so it loads the rest of the last few days of data. Now let's compare this session as an example, in this type of tick database volume chart where a volume is considered such, where you had at least one tick up or one tick down and that constitutes one volume. But for every tick up or every tick down there could be countless contracts being traded. So it's a proxy again, so it's not going to be as precise as this. And as you can see if, if the point of control of this distribution is now here around the prices of 6991 here the point of control is at 6987, so several points below. So you don't have the same level of reliability and the level of details that allow you to take truly informed trading decision. Because again this is a proxy which approximately gives you the same value area. Okay, like this is pretty decently similar even though even here you can see that that this volume area ends here, but the actual value area here ends up below all of these lows. So slightly below, as you can see there's some considerable differences here. That makes me, if I want to pay even around the same price, I'm going to go with the real deal, I'm going to go with the actual volume profile and so on these situations. For example, we can see that the last distribution of volume was here. So this is the previous session volume profile, right? And so this is what we can consider the first standard deviation, right? And what volume traders typically will do is they will consider the area around the 70%, the upper limit of the first standard deviation and the area around the lower standard deviation as an overall area of support and resistance. As we discussed before. And around all of this area is where you had a lot of trades try to break out and revert back to the mean, bounce from the downside, bounce from the upside all the way to the mean. And this is the first time where instead we had some volume over here which is probably going to lead to a breakout at this point. But let's see, we don't know it's still the London session. And another reason why I would use for example a deep charts volume profile is that you can go down here in the daily volume profile, go to the settings and set it not only with volume but with volume and delta, which is a very interesting type of data. So instead of just having a normal profile, this profile shows you the delta of volume at each level. So you have to know that the way volume is calculated is the normal volume is total buying pressure and total selling pressure. Delta tells you the total buying pressure minus the total selling pressure. So, so you have the net level of pressure at each level of price. This is what we call a delta profile. So it's not just a volume profile. That's why it's called the deep profile, right? It's in the name, it's the deep profile. It's the deeper level of information than just volume. And you can see that here there was a big sell order at the very top right over here that brought price back into a situation of balance, right? And then you clearly saw, saw a very big cluster of aggressive buying happening all the way at this level of prices. And that's exactly where buyers step in again in the rest of the session and pump all this way up. This is something that you probably have seen Fabio Valentini, one of the best scalpers out there, use a lot, this delta profile where you can also clearly see from the previous session, where was the area with most selling? Well, it's clearly this one, there's no doubt about it, it's numbers, right? So all of this area we can extend it and you put a little bit of a background and this is where the battle happens a lot of time. This is where sellers take control of the auction over and over and over again multiple times and again here a lot, a lot, a lot of times. And another information that the deep profile gives us is this yellow line here which is the volume weighted average price, which is also known as the vwap. And the VWAP is simply the average price of the entire session weighted by volume, which is this one over here. We can set it up and we can also have the developing vwap, which a lot, a lot, a lot of traders love to use special institutional traders because it's the most common reference points to, you know, it's one of the most common levels or mathematical formulas used in the institutional space for best feeling algorithms, best execution algorithms and stuff like that. And another very interesting thing that we can do is we can go down all the way to filter, split time and have it split it rth, which basically mean it's going to split the profile in two different profiles, one being the cash session or the regular trading hours that the stock market session and the other one being the Asian session and the London session. So for example, I can also have between the indicators, I can search for volume, which is the classic volume indicators that you know, shows you volume by time instead of volume by price. And you can clearly see, you know, the regular trading hours are the hours where most volume is traded. So you might want to have only the volume profile for the so called Cash session, the regular trading hours, because that's where most money is traded anyways. And consider these areas. So the areas, the value areas of the volume profile of the cash session instead of the entirety of the session. And you'll see that those are the areas that responds best for price action ideas for breakout ideas. So this is how I personally like to keep my volume profile looking. So to summarize a way we can use this for example is the first use case would be to see approximately roughly where these volume profiles are going, right? And whenever we see a shift in volume, it's not just a shift in market structure, it's a shift in where the real flow of money is going, which is a much more statistically significant indication than simply highs or lows that can be widely random at times. So as we like to see bulks of price action, we want to see bulks of volume because that's where the money is going. So instead of just using the classic market structure, we can use volume market structure, also known as the auction market theory model. So the first way is to determine a bias so we know the trend is up if we see volume going up if we see the money going up. The second way we can use this is to qualify support and resistance quote unquote or supply and demand areas where if we already know that we're in an uptrend, this is the previous session value area, the point of control. We know that for example if we want to look for buy opportunities, we might wait for around this area, the lower part of our distribution. We want to see price failing below and then entering our trade together with the trend and maybe target the other side of the value area. Or if we spend some more time inside here, but then we break out and spend some time inside then opt for a breakout type of trade. So the first is bias, the second use case is as a support and resistance area. And lastly we could also use it as a trigger which is the final use case that I will show you today. And I'm just going to go on templates in the full version I'm going to select Andre Shimi ES five minutes and this is a template that you can find inside of deepcharts where you can simply already have the split volume profile for each session, the cash session and the the London plus Asian session, the extended trading hour session or electronic trading hour session. A composite volume profile that tells you the entirety of the volume distribution of the chart you have that I typically like to go on up over here, price settings and maybe I want to load, for example, I don't know, 90 days of price. I'm going to apply it, save, it's going to build the chart because there's a lot of data that needs to be processed. There you go. And Now I have 90 days worth of market data and I have a very beautiful overall profile distribution of the current volume. So I can use this as a long term bias. Then I can use sessions, the daily sessions as my intraday bias plus and finally I can use the volume profile of each and every single one of the candles. As you can see, the more I zoom in, the more I can see there's a volume profile in each candle and I can see through order flow. So through short term volume trading activity, if there's absorptions or if there's initiative phases, for example, I can see from the volume profile distribution of this candle there was a lot of, of buying happening over here. Let's zoom in and see it with our own eyes. Make the text a little bigger. Yep. And as you can see, a sell candle happened here, which means sellers took control of the auction. And here I can see that there is something happening over here that most price action traders won't be able to see, which is there is a buyer here which was trying to buy this market, but a huge seller blocked his way up. So there was a huge chunk of volume over here that shifted from being up here. So the first distribution was over here. This is where this was the main, let's say value area. And now the value area is shifted and we have a lot of volume traded over here. So we not only have an engulfing type of pattern where you have one candle being bigger than the previous one, but we can also have an extra confirmation with volume that allows us to have an even deeper edge to understand who's really in control. And after that candle you see price melting down right after we've failed to break out the main value area of, of the daily distribution. And so when you see a pattern like this and when you see such a shift in volume in the short term timeframes, as a confirmation of your main idea in the higher timeframes, which is the one we talked about before, where we have a statistical anomalies in this session and we might as well fade it back to the mean, that's our trigger with a stop above here and trading all the way until here. Or another example here of the opposite type of setup where we have, yes, a distribution of volume around this area. So this is our current value area. And in the following session, what happens is, and of course we only take a look at this cash session, forget about the London session for a second and consider this cash session instead. Even though, as you can see, these areas are pretty much working all the way. Also in the London session multiple times, what happens here is we start the session on the lower side, we go, we shoot all the way up to the other side of the range. We fail to auction above, we drop back inside, reverse back to the mean, but then we break out again. And when we break out again, it means we're starting to spend a long time there. And for example, this is the opening range. And when we break out of the opening range, we can buy this market with a very conservative stop loss right below here and basically take this entire session for a 1 to 3 risk to reward ratio with a really, really high win rate when we have a qualified breakout outside. So you can either again, fade the bottoms and the tops of the volume profiles of the first standard deviation of volume or trade the breakouts when you have serious confirmation that we're actually moving out of the current area of fair value. And these, my friends, are some very easy examples on how to use the volume profile. And by the way, of people ask me, how about the point of control? How should we use the point of control? Should we enter on the point of control? I would not look at the point of control as a singular level because that can be random at times. I prefer to look at distribution of volume. That has much more meaning than how much volume was traded in a single level. Because look at this. Yeah, this is the point of control. This is the level where most money was traded. But look at the following one. It's basically the same amount of volume. This one is basically the same amount of volume. This one is the same amount of volume. There's not a huge difference. It's just maybe also randomly this is the main point of control. But who cares? Like, this is the high volume node. It's more important to find a high volume node than the actual precise point of control because again, as we said, that can be due to algorithmic activity that was not meant to be at that specific level, but more in an area of price. Okay? And as of now, you've just seen me, you know, show you past stuff, okay? So another thing that people might say is, yes, in hindsight, everyone's good to cherry pick a couple example. And I totally get that I need to do that to show some examples. If you want to see some live examples, we're going to trade with the volume profile every week inside of this channel. So if you haven't subscribed yet do it now and click the notification bell so you don't miss out on the practical implementation of the stuff which is of course the most important part if you want a specific in depth full tutorial on how to set up your volume profiles, all the little nitty gritty details and the nerdy stuff on how to properly set up your volume profile, all the different types of volume profile like the deep swing profile like the fixed range profile like this one, the comp, how to set up the composite volume profile and all of these beautiful tutorials. I'm going to make an in depth tutorial on The Deep Charts YouTube channel. I'm gonna leave the link down below and in the next few days you're gonna see a tutorial there that I might link all the way over here. That's all for today folks and I will see you in the next one. Ciao.