Volume profile saved my trading life…
Getting to Know The Auction
Since I was little I always enjoyed auctions, the thrill of getting a deal, the fascination of watching some people get emotionally involved and pay way too much for something. That whole macho stare-down that men do when someone else is bidding against them! I still remember a guy at a government surplus auction going up near the auctioneer and just holding his card up in the air while everyone bid against him… he didn’t take it down until the auctioneer said “Sold to number blah blah” I had no idea if he got a good price or not, but he certainly made a statement and got what he wanted.
I think this is why I love volume profile so much! It just shows the auction in such a clear and unfettered way. Unlike the example above, I can take a quick look and make a reasonable historical assessment if the price is too expensive… too cheap… or just fair. Having used VP since 2009, I find any charts I look at I am wanting to see the profile. Doesn’t matter if it’s futures, stocks, or crypto. Just let me see what all auction participants have determined to be fair and unfair. Once you know those levels, you can start to determine your risk-reward. Most people are so focused on their entries, but I’d rather know where I am clearly wrong. For example, let’s say I want to get long XYZ stock at $5, and there is a clear multi-month HVN (high volume node) below me between 4.60 to $5. From this, I can expect sellers should really need to work HARD to get the price back below $4.60. In a fairly liquid market, I don’t need to risk much more than 50 cents to find out if my long scenario will work or not. Ok, so got the risk out of the way… but what about a target? First thing I ask… where is the next HVN is to the upside? Hmm, check the charts and see it’s at $7.50. Considering I want to just grab a chunk of the potential move from balance to imbalance, then I would be looking to exit around the $7 area or so. This is a potential 4R gain, which meets my minimum requirement of at least 3R. Take the trade!
Now Using Volume Profile in Crypto
So in a few weeks, it will be my one year anniversary of losing my crypto trading virginity by starting to trade Theta (which I have blogged about from the start in Long Term Investing), and since then I have traded Bitcoin, Ethereum, Solano, Luna, TFuel to name a few. I find among the crypto crowd that the use of VP is unknown or very limited. I’ve only come across one maybe two people outside of Convergent that actually use VP for trading crypto. For me, it gives me a huge edge for both entries and exits as it clearly shows what is fair and unfair. Dad always said… “Son, you make your money when you buy”.
But more importantly, Volume Profile tells me a story (and I like stories) as it shows me what the auction is really doing. If you listen, this grounds you in a way like nothing else!! It cuts through the hype, BS, and whatever mental beliefs you share on that investment. I mean… hey, if these crypto/stock/futures has such a great story and everyone is bullish…. why am I seeing all this selling? And why is price having such a hard time pushing up through that multi-month high volume node?
Those were the questions I had asked myself when I sold 50% of my Theta at $6.46. The story was price would explode because of blah blah blah, and the people that helped me learn about Theta were buying more or holding. But Volume Profile was telling me a different story…. sellers had decided the price was too expensive and they were selling this. Buyers couldn’t get control. So if this HVN couldn’t hold, the next downside target was the HVN at $2 to $2.25. Seemed hard to believe at the time, but that is how the auction works. It goes from balance to imbalance to balance. Theta just hit a low this week of 2.27 and reversed. I started buying at $2.45 when I realized my orders at $2.03 and $2.11 wouldn’t get filled and I now have my full size back on at an average cost of $2.63. But the point is… THE STORY!
VOLUME PROFILE ALWAYS TELLS A TRUE STORY… YOU JUST NEED TO LISTEN.
Volume profile saved my trading life…
– Jeff Wagner (@NanaimoTrader, a Head Trader at Convergent Trading)
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Jeff — great article! I always appreciate your informative, interesting and useful insights . . . thank you!!
Great article, Jeff. I love the parts describing how to got to where you are as a trader.