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Volume profile: POC, value area and what the profile cannot see

By Author of ORDER FLOW — Market Mechanics

A volume profile answers a question the candlestick chart leaves open: at which prices did most of the volume trade?

It is the context layer that the rest of an order flow reading rests on. In the book it belongs to the map, the structure marked before the session starts, and the footprint only comes in after it.

Turning the axis

A candlestick chart distributes volume by time: each candle holds what traded during one interval. A profile distributes it by price: each bar holds what traded at one level, whenever that happened.

The result is a horizontal histogram attached to the price axis. Where the market spent a long time crossing contracts, the bar is long. Where it passed straight through, the bar is short.

value area · 70% POC VAH VAL 21,302.00 21,302.50 21,301.25 HVN LVN The vertical axis is price. Each bar is the volume traded at that level.
Schematic of the anatomy of a session volume profile on NQ. Values are illustrative.

The vocabulary is short. The POC, or point of control, is the level with the most volume in the profile, the longest bar. The value area is the range that holds a set percentage of total volume, and its edges are the VAH and the VAL. An HVN, a high volume node, is a zone of long bars, and an LVN, a low volume node, is a zone of short ones.

The reading underneath is an auction. An HVN is a stretch of prices where buyers and sellers agreed to trade for a long time, so price tends to move slowly there. An LVN is a stretch the market crossed without finding enough counterparty, so price tends to cross it quickly when it passes again. The book adds a caveat to the second: nothing stops a large participant from leaving hidden liquidity in an LVN precisely because few people are watching it.

Both statements describe speed of travel. The profile says where price will find it hard to advance and where it will not; which way price goes is outside what it measures.

The 70% is an inherited convention

The value area is almost always defined as the range containing 70% of the volume. It sometimes appears as 68.2%, and some traders use 80%.

That 68.2% gives away where the figure comes from. It is the share of a normal distribution that lies within one standard deviation of the mean, and the value area came from treating the profile as a bell curve and keeping its central part.

The trouble is that a real volume profile is almost never a bell. It usually has several humps, lopsided tails and gaps. Applying a threshold designed for a shape it does not have is still a useful convention, because it gets everyone looking at the same place, but that does not give it a statistical meaning of its own.

In practice, the VAH and VAL on your chart sit where they do because someone picked a percentage. At 68% or at 80% the edges move, and so does any reading built on “price has left the value area”.

The POC depends on the window

The second arbitrary parameter weighs more than the first: which period gets profiled.

21,303.00 21,302.00 21,301.00 21,300.00 Session POC Week POC Composite POC The same market, three different levels. Each POC belongs to the period chosen for the profile.
Schematic of three profiles of one market built over different periods. Values are illustrative.

The session POC, the weekly POC and the POC of a composite covering several weeks can fall at three completely different prices. All three are correct, because each one summarises a different set of data. The book adds a second decision to the choice of period, which hours to include: a composite built on regular-session hours and one that includes the overnight do not give the same levels.

That is why “the POC is at 21,302” is incomplete until you say for which period. It is also why the profiles you are going to use have to be chosen before the chart is open, instead of trying windows until a level shows up near where you already wanted to trade. With enough windows to choose from, there is always a POC near any price.

Yesterday's close has a similar problem. On NQ at least three prices can claim the name, and the official one, the settlement, does not necessarily match the last candle.

What the profile throws away

A profile adds up the total volume at each level. To build it, there is no need to know whether each contract was bought at the ask or sold at the bid, and in fact that information is discarded.

One profile level 1,200 contracts traded A · Agreement Bid Ask 600 600 Both sides executed evenly. B · Absorption Bid Ask 180 1,020 Buying aggression held with no advance. The profile bar is identical in both. The split between aggressors is not in it.
Schematic of one profile level with two different splits of its volume between aggressors. Values are illustrative.

At one level, 1,200 contracts can be 600 against 600, both sides trading comfortably in genuine agreement on price. They can also be 1,020 contracts of aggressive buying against 180 with price failing to advance, which is the signature of absorption.

The two situations have opposite implications and produce exactly the same bar. Telling them apart means going down to the footprint, which keeps the split by side.

That gives the natural division of labour between the two tools. The profile decides which levels deserve attention, and the footprint decides what is happening when price reaches one of them. Using the profile for the second job is asking it for data it does not hold.

On the POC as a magnet

You often read that the POC acts as a magnet and that price tends to return to it. The observation has some basis, but it needs separating from the explanation attached to it.

What is observed is that high-volume prices tend to be revisited. The explanation is mundane. At a heavily traded level, many participants hold positions opened at that price, and liquidity tends to come back there because those who trade in that range regard it as an acceptable price. That produces activity when price returns.

“Price will return to the POC” is a prediction, and it fails as often as predictions do. “If price returns to the POC, it will probably find activity there” is a conditional description, and it lets you prepare without having to get the timing right.

The most widespread version of the prediction is the naked POC: a previous session's POC that price has not gone back to. What counts as going back, and during which hours, is decided by whoever is looking.

Common mistakes

Using a profile without choosing its period. The default period on a platform is whatever someone configured, and it may not match your horizon.

Treating an LVN as support. A low volume node is precisely a stretch where there was no counterparty. Expecting it to stop price is expecting the opposite of what the data says, and the book's LVN setup uses it the other way round, to travel with the move through the node.

Reading an unfinished session's profile as if it were closed. A mid-session POC moves. The level you are deciding on may not be the level at the close.

Trading the level without looking at what happens on arrival. The profile marks where. Whether anything is happening there is shown by delta, by imbalances and by the price reaction.