Peter Steidlmayer initially introduced the Horizontal Volume Indicator to the public in 1984. The indicator was created using a graphical distribution to show price acceptance or rejection over time. Since their introduction, horizontal volume charts have improved traders’ comprehension of markets and paved the way for more rational market analysis.
What is a horizontal volume indicator?
A horizontal volume indicator is a technique of charting analysis that displays trade activity over time and at a particular price level. It draws a histogram on the chart to show the prominent price levels based on volume. The indicator divides total volume traded at a given price level during a certain time period into buy or sell volume and then displays that information to the trader.
Values used and their definition
- Point of Control (POC): This is the area in the chart with the most traded volume activity. This is the most important area to keep an eye on since it helps traders identify where they want to put their stops or where they can discover the best entry levels on the chart. Forex traders use it as a retest. It can also be used as a point of support or resistance.
- High Volume Nodes (HVN): These are chart sub-sequences with a lot of activity. This is a powerful area that signifies increasing trade activity.
- Value Area (VA): This is the price range in which a certain percentage of total volume was transacted. Industry norms are usually set at 70% by default.
What to look for
There are a few rules of thumb whenever you’re using this volume indicator. These rules are to help one identify the prevalent market trend at a moment’s glance. For instance, during consolidating markets, prices will typically intermittently fluctuate between high-volume nodes and low-volume nodes. In addition, the value area will be at the center of the volume chart.
During bull markets, when prices are on the rally, prices tend to retrace to the value area high. The value area will thus be situated at the bottom of the chart. Conversely, during bear markets, the value area will be at the top of the chart.
How horizontal volume indicator works
Identifying support and resistance
A horizontal volume indicator can be used to highlight levels where prices found support and resistance. Usually, both of these levels will be marked by high trade volumes. As you approach the top of the volume profile, you may notice a long volume bar on the histogram, on which the majority of the volume traded is on the sell-side. Such a bar points to a resistance level at that price point.
Similarly, as you approach the bottom of the profile, you may see a long bar, only this time, the most volume is stacked on the buy-side. This shows that at that price point, the pair found support several times.
In the AUDUSD chart above, the horizontal line marked A can be used as the resistance level.
In the USDCAD chart above, the horizontal line marked B can be used as a support level.
Identifying volume nodes
High Volume Nodes
High Volume Nodes (HVN) are volume peaks that occur at or near a certain price level. They might be viewed as a sign of a consolidation stage. When compared to other levels in the profile, there is usually a lot of activity on both the buy and sell sides, and the market stays at that price level for a long time.
Low Volume Nodes
They are volume valleys at or near a price level. A breakout rally or a crash frequently results in low-volume nodes.
A considerable drop-off will usually follow an early burst of volume during a rally or a breakdown.
Interpreting the various shapes of the volume indicator
Sometimes, this indicator takes on recognizable patterns that could point to different market states. The most common shape resembles the capital letter D. This usually points to a state of equilibrium in the market between sellers and buyers.
The indicator could resemble the letter P, which points to a market rally. The opposite of this would resemble the small letter b, which signifies the culmination of a bull run or a downtrend. Sometimes, the volume bars do not accumulate high figures, leading them to form a shape similar to the letter I. This usually points to a period of rapid price movements characteristic of very strong trends. Due to the high volatility, traders do not have time to accumulate volumes on any one price.
Pros of using horizontal volumes
- A better grasp of the market and a visual assessment of its state
- Effective determination of support and resistance levels
- Preliminary risk assessment for each transaction, as well as precise stop placement — exactly outside the Value Area boundaries
- Profitability and risk ratios are forecasted: if the Value Area is divided into eight octants, the risk is one octant, and profitability is three octants
- A limit order is a well-thought-out point of entry into the market
- A basic and transparent trading system (rules) is available, as well as objective identification of personal competitive advantages
Cons of using horizontal volume indicator
- Traders need to use wide stops when trading points of control.
- Sometimes the price fails to reach the levels of control.
- Positional trading is not for everyone due to the long holding time.
Forex traders vastly use horizontal volume indicators during trading. It’s a charting tool with a wide range of applications. Unlike many other indicators, there is minimal to no disagreement over the utility of Volume Profile. The indicator is irrefutable, so it’s up to the trader to come up with fresh and inventive methods to use it. It can be used to find the resistance and support levels and also to identify volume nodes.