Volume Profile Part 3: Pockets of Hot Air
Welcome to the final part of our three-part series on Volume Profile Analysis. In the previous segments, we covered the essentials of Volume Profile and techniques for uncovering hidden market levels. In this final instalment, we’ll explore how to trade breakouts using the concept of pockets of hot air—areas where the market moves efficiently from one high-volume zone to another.
The Concept of Pockets of Hot Air
The idea behind pockets of hot air is rooted in market efficiency. An efficient market continually seeks equilibrium by moving price to levels with the highest trading activity. Essentially, the market will travel from one area of high participation to another, bypassing lower-volume regions where price acceptance is less established.
Pockets of hot air refer to the price spaces between these high-volume zones where the market has not yet formed strong consensus. These areas can act as rapid transit zones where prices move quickly as the market transitions from one high-volume area to the next. By identifying and trading these transitions, traders can capitalise on swift price movements.
Technique: Trading Breakouts Between High-Volume Zones
Step 1: Map High-Volume Areas with the SVP HD Indicator
• Apply the SVP HD Indicator: Start by applying the Session Volume Profile High Definition (SVP HD) indicator to an hourly candle chart. This indicator will help you identify high-volume areas by showing the concentration of trading activity within each trading session.
• Identify High-Volume Zones: Observe where multiple Points of Control (POCs) cluster across various sessions. These clusters indicate areas with high trading volume and are your high-volume zones.
Brent Crude with SVP HD Indicator Hourly Candle Chart
Past performance is not a reliable indicator of future results
Step 2: Look to Trade Breakouts Backed by Technical Catalysts
• Remove SVP HD for Clarity: To focus on trading opportunities, remove the SVP HD indicator from your chart. This will help you better visualize price action and technical patterns without the clutter of volume data.
• Identify Breakout Patterns: Look for technical patterns that signal a breakout, such as a symmetrical triangle in the example below.
Brent Crude Hourly Candle Chart: Triangle Consolidation Pattern Within High Volume Zone
Past performance is not a reliable indicator of future results
Step 3: Trade the Breakout
• Entry: Trade the Breakout: Enter your trade when the price breaks out of the pattern and moves towards the next high-volume zone. This approach leverages the market’s tendency to move efficiently between high-volume areas.
• Set an Initial Stop Loss: For risk management, place an initial stop loss below the lows of the current high-volume zone. This protects your trade in case the market reverses before reaching the next high-volume zone.
Brent Crude Hourly Candle Chart: Triangle Breakout
Past performance is not a reliable indicator of future results
Brent Crude Hourly Candle Chart: Target Hit
Past performance is not a reliable indicator of future results
Conclusion
We hope our mini-series on Volume Profile Analysis has sparked new ideas and insights for your trading strategies. By focusing on the distribution of trading volume at different price levels, Volume Profile Analysis allows you to see beyond traditional price action, identifying hidden support and resistance levels that aren’t immediately obvious.
Mapping high-volume zones using indicators like SVP HD and VRVP can help uncover key market areas where significant trading activity occurs. Understanding how markets move efficiently between these zones offers valuable breakout opportunities, especially when supported by technical catalysts.
By incorporating these methods into your trading routine, you can improve your decision-making, anticipate market moves more accurately, and manage risk effectively. Thank you for joining us on this journey through Volume Profile Analysis—here’s to more informed and successful trading!
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
The Concept of Pockets of Hot Air
The idea behind pockets of hot air is rooted in market efficiency. An efficient market continually seeks equilibrium by moving price to levels with the highest trading activity. Essentially, the market will travel from one area of high participation to another, bypassing lower-volume regions where price acceptance is less established.
Pockets of hot air refer to the price spaces between these high-volume zones where the market has not yet formed strong consensus. These areas can act as rapid transit zones where prices move quickly as the market transitions from one high-volume area to the next. By identifying and trading these transitions, traders can capitalise on swift price movements.
Technique: Trading Breakouts Between High-Volume Zones
Step 1: Map High-Volume Areas with the SVP HD Indicator
• Apply the SVP HD Indicator: Start by applying the Session Volume Profile High Definition (SVP HD) indicator to an hourly candle chart. This indicator will help you identify high-volume areas by showing the concentration of trading activity within each trading session.
• Identify High-Volume Zones: Observe where multiple Points of Control (POCs) cluster across various sessions. These clusters indicate areas with high trading volume and are your high-volume zones.
Brent Crude with SVP HD Indicator Hourly Candle Chart
Past performance is not a reliable indicator of future results
Step 2: Look to Trade Breakouts Backed by Technical Catalysts
• Remove SVP HD for Clarity: To focus on trading opportunities, remove the SVP HD indicator from your chart. This will help you better visualize price action and technical patterns without the clutter of volume data.
• Identify Breakout Patterns: Look for technical patterns that signal a breakout, such as a symmetrical triangle in the example below.
Brent Crude Hourly Candle Chart: Triangle Consolidation Pattern Within High Volume Zone
Past performance is not a reliable indicator of future results
Step 3: Trade the Breakout
• Entry: Trade the Breakout: Enter your trade when the price breaks out of the pattern and moves towards the next high-volume zone. This approach leverages the market’s tendency to move efficiently between high-volume areas.
• Set an Initial Stop Loss: For risk management, place an initial stop loss below the lows of the current high-volume zone. This protects your trade in case the market reverses before reaching the next high-volume zone.
Brent Crude Hourly Candle Chart: Triangle Breakout
Past performance is not a reliable indicator of future results
Brent Crude Hourly Candle Chart: Target Hit
Past performance is not a reliable indicator of future results
Conclusion
We hope our mini-series on Volume Profile Analysis has sparked new ideas and insights for your trading strategies. By focusing on the distribution of trading volume at different price levels, Volume Profile Analysis allows you to see beyond traditional price action, identifying hidden support and resistance levels that aren’t immediately obvious.
Mapping high-volume zones using indicators like SVP HD and VRVP can help uncover key market areas where significant trading activity occurs. Understanding how markets move efficiently between these zones offers valuable breakout opportunities, especially when supported by technical catalysts.
By incorporating these methods into your trading routine, you can improve your decision-making, anticipate market moves more accurately, and manage risk effectively. Thank you for joining us on this journey through Volume Profile Analysis—here’s to more informed and successful trading!
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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