Fixed Range Volume Profile: Definition and Trading Strategies

FXOpen

The Fixed Range Volume Profile (FRVP) has long been favoured by traders for its ability to accurately predict the market direction and key turning points. However, its complex appearance can put some traders off. In this FXOpen article, we’ll take a deep dive into the FRVP, how to use it in a trading strategy, and some common mistakes to avoid.

The Fixed Range Volume Profile Explained

The Fixed Range Volume Profile (FRVP) is an advanced tool that plays a key role in assessing market activity. It provides a comprehensive view of the market by shedding light on trading volume and price data over a specific period. Unlike traditional price-based indicators, the FRVP incorporates volume data, offering a deeper insight into market liquidity and supply and demand dynamics.

The FRVP presents a distribution of trading activity, represented by horizontal bars at various price levels within a fixed range, typically from one key swing point to another (e.g. a swing high to a swing low). It shows areas of high and low activity and helps traders spot areas where the market has spent considerable time and where it traded through easily.

Components of the Fixed Range Volume Profile

The Fixed Range Volume Profile can be broken down into three main components. The first is the ‘Value Area’, representing the price range where a specified percentage of total volume has occurred, typically 70%. It demonstrates the levels at which most trading activity has transpired.

Second, we have the ‘Point of Control’ (POC), the price level with the highest traded volume within the selected range. The POC can be considered as the price level where the market found the most acceptance and is usually plotted as a red line.

Lastly, the ‘High Volume Nodes’ (HVN) and ‘Low Volume Nodes’ (LVN) represent peaks and troughs in volume at different price levels, respectively. Both play key roles in volume profile analysis, which we’ll touch on shortly.

Why Is Volume Important?

In trading, volume is a critical metric, measuring the total number of units traded in a security or market during a given period. It is an important tool for gauging the strength of a price move as it provides clues about the intensity of trading activity. High volume typically suggests strong interest and signifies a more active market, while low volume indicates less interest and a more passive market.

How to Use the Fixed Range Volume Profile in a Trading Strategy

Now that we’ve answered, ‘What is the Fixed Range Volume Profile?’, let’s take a look at three ways to incorporate the indicator into a strategy. If you’d like to see how it works for yourself, head over to FXOpen’s free TickTrader platform and look for the ‘Volume Profile Fixed Range’ under Indicators.

One of the most effective applications of the Fixed Range Volume Profile is its use in gauging market trends. The interaction of price with high and low-volume areas can give valuable insights into market sentiment.

When analysing market trends using the FRVP, traders need to pay close attention to areas of low volume, or LVNs. These areas, characterised by limited trading activity, often suggest an imbalance between supply and demand where the market moved rapidly. As such, they create a price gap or vacuum in the profile.

In the markets, these low-volume gaps are likely to be filled over time. An asset’s price usually tends to move quickly through these areas in search of the next area of value, represented by HVNs. As such, LVNs can act as powerful directional indicators, pointing to the potential for swift price movements, either upward or downward, to reach the next HVN, where market acceptance is greater.

Using HVNs and LVNs for Support and Resistance Trading

The FRVP can be an invaluable tool in identifying support and resistance levels. HVNs often indicate levels of strong support or resistance as they reflect periods where a significant amount of trading has occurred. These are areas where the market has shown acceptance, often making them difficult to breach.

Conversely, LVNs, with their relatively lower trading activity, often highlight potential breakpoints. Because these are levels at which the market has shown rejection, they are less likely to act as strong support or resistance areas, and the price is more likely to pass through them more quickly.

Therefore, traders can use HVNs and LVNs as a basis to establish potential entry and exit points in their trading strategies. For example, a trader may consider entering a long position when the price breaks above an HVN (an area of resistance). Similarly, an LVN above the current price might be a good target for this long trade, as the price could rise quickly to this level.

Using the Point of Control (POC) for Support and Resistance Trading

In addition to HVNs and LVNs, the Point of Control (POC) is another crucial element within the Fixed Range Volume Profile. The POC represents the price level at which the highest volume was traded over a particular period. This makes it an area of significant market acceptance, which can function as a strong level of support or resistance.

In an upward-trending market, the POC often acts as a support level, where buyers may enter or add to long positions, expecting the price to bounce back upwards. Conversely, in a downward-trending market, the POC can serve as a resistance level, where sellers might consider short positions, anticipating price rejection.

FRVP Trading Example

In this example, we see the market cooling off after a prolonged uptrend to the left (finishing just on the edge of the chart). The price fell sharply, finding a bottom. Given the distinct high and low points, we can set the FRVP tool to these points.

The first area to notice is the POC, which acted as strong resistance within the multi-day range. Traders could have anticipated this area to hold, using other forms of technical analysis to find entries on a lower timeframe.

The POC area was eventually pierced through, indicating that it may be time for the price to come and meet the LVN toward the top of the range. This level represented the area with the lowest volume in the entire range. Combined with the prior bullishness offscreen, traders could have been confident that the price would at least reach this area, acting as a solid target if they had bought earlier near the POC.

However, it moved higher to tap the HVN (blue line). Notice that it’s the area with the highest volume besides the POC. After reaching the HVN, the price quickly reversed. Similar to the POC, traders could have anticipated bearishness from this area. The tweezer top chart pattern here acted as excellent confirmation.

Common Mistakes When Using the Fixed Range Volume Profile Indicator

So what are the common mistakes many traders make when using the Fixed Range Volume Profile indicator?

Misinterpretation of Volume Nodes

Traders may incorrectly assume that all HVNs or LVNs are equally significant. However, their importance can vary based on the broader market context. For instance, strong bullishness in the market may cause an HVN to be traded through with little consideration.

Neglecting Other Market Indicators

Some traders rely solely on Fixed Range Volume Profile and ignore other crucial market indicators. This approach can result in a one-dimensional trading strategy, which is never a good thing. A solid Fixed Range Volume Profile strategy should include other tools that can help confirm reversals at support or resistance levels, like the Relative Strength Index (RSI) or MACD.

Over-reliance on Historical Data

While the FRVP is effective in visualising historical trading activity, it is not a crystal ball predicting future price movements. Traders should avoid the mistake of considering the volume profile as the sole indicator of future trends. It’s a good idea to consider the fundamental factors that may drive a market in a certain direction and then complement your analysis with the FRVP.

Final Thoughts

In this guide, we've unpacked the complexities of the Fixed Range Volume Profile (FRVP), revealing its components, applications, and potential pitfalls. You have seen how the FRVP provides a window into the interplay of volume and price data, how it aids in spotting market trends, and how it identifies key support and resistance levels. Hopefully, you now have a solid overview of when and how to use the FRVP.

If you feel ready to put your FRVP skills into practice, you can open an FXOpen account and gain access to over 600 markets, benefiting from competitive trading costs and lightning-fast execution in the process. Good luck!

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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