Many traders out there think that Volume doesn’t matter. After all, it takes 2 traders to make a trade. Both sides are always present, so why does it matter? And in the traditional sense, I agree. But when looking at volume from a Volume Profiling standpoint, it shows us which traders have been most aggressive.
When looking at an area of High Volume (HVA), I may want to see who is being more aggressive; Buyers or Sellers. One way to measure this is to look at who is being more aggressive on the trade by seeing whether the trade happened on the Bid price or on the Ask price. If a trade happened on the Bid, we assume that the Seller was more aggressive than the Buyer and was willing to accept the Bid price, or issued a Market order which would fill them at the Bid. In this case we consider the Seller to be more aggressive. The opposite case is the same with the trade happening at the Ask, we would assume the Buyer is more aggressive.
Another easier way to calculate this is to look at Up-Down Volume. If price ticks up, we assume the Buyers were more aggressive which lead to the tick up. Then all trades that happen at the price we assume to be “Up Volume”. If price ticks down, we assume the Sellers were more aggressive and willing to accept a lower price, and thus all ticks that happen at that price are considers “Down Volume”.
As some people have shown, there is little difference between the “Bid-Ask” and “Up-Down” methods. However the differences come in where getting “Bid-Ask” data can sometimes be inaccurate due to periods of volatility. Regardless of the method you use, they both offer an advantage. However for the rest of this article, I will refer to the “Up-Down” method which can be replaced with the “Bid-Ask” method.
When a trade happens, if it happen on an up tick, we record the volume of the trade as “Up Volume”. If a trade happens on a down tick, we record the volume of the trade as “Down Volume”. Now you can record this volume for any type of bar you want, but let’s assume for our purposes that we are using 6 tick Range bars. Thus as the market trades through the 6 ticks of our range, we build Volume Delta by summing the Up Volume and the Down Volume.
As the bar progresses, we can see whether or not the Buyers or the Sellers are being more aggressive by comparing the Up Volume to the Down Volume. If Up Volume is significantly more than Down Volume, then we can assume that Buyers are being more aggressive than Sellers, and vise-versa. This can give us a visualization of whether or not an area will hold or not, but seeing if the appropriate traders are entering the market at our area. This also helps us see if larger amounts of volume are entering the market in 1 direction, helping us to predict if the area will hold.