Video Transcript:
Hey everyone, it’s Dale here. In this video, I want to show you three very common mistakes that I see all the time with Volume Profile traders. And honestly, I’m not surprised. These are the kind of details that almost no one talks about, but they make a huge difference. This will be especially useful if you already trade with Volume Profile and want to fine-tune what you are already doing. But even if you are newer to Volume Profile trading, this will help you avoid mistakes that cost traders a lot of money later on. So, let’s get to it.
So, mistake number one is trading from the Point of Control instead of the edge of a heavy volume zone. Let me start by doing a little drawing here. Take a look at this volume profile. It has a Point of Control right here. The Point of Control is the place where the volumes were the heaviest. And what most Volume Profile traders do is trade from that Point of Control. So, they mark that place like this. If the price goes up, they wait for the pullback, and they go long from there, exactly from the Point of Control.
But the problem is that the price often doesn’t quite reach the Point of Control. What often happens is that the price turns a little bit sooner, like this. So, what I recommend doing here, instead of trading from the Point of Control, is trading from the beginning of the heavy volume zone, or in other words, from the edge of that heavy volume zone, like this. This is where you enter the trade, and if you do it like this, you won’t miss as many trades.
You know, I was also trading from the Point of Control in the past, but then I was going through my trading journal and through my screenshots of my trades, and I noticed that I was missing too many trades just because of that. So, I changed my strategy a bit from trading from the Point of Control to trading from the edge of the heavy volume zone, and my trading improved dramatically.
Now, let me show you a couple of examples of this. Here is the first example. Take a look at this volume profile right here. And this is the Point of Control, the place where the heaviest volumes were traded. So, if you wanted to trade from here, that would mean going long from this line. You would simply miss your opportunity here. You would miss the trade. But if you trade it from the beginning of that heavy volume zone, you wouldn’t miss it, and it would be a beautiful trade, right? So, this is where you should go long from, not the Point of Control.
Now, here is another example. And here we have a short trade example, and we have a heavy volume zone in here, followed by a nice sell-off. And if you are trading from the Point of Control of this heavy volume zone, then you would be trading from here, and you would miss the trade. See? You would miss the trade entry. But if you follow my advice and trade from the edge of the heavy volume zone, then in this case, you would be trading from here, and it would be a nice winner. All right, this is what I’m talking about. The market simply likes to react to the edge now, not to the Point of Control.
This is a long trade example. We have an uptrend, that’s why we’ll be looking for a long trade. We have this volume cluster here, and the Point of Control of this volume cluster is right here. So, if you wanted to go long from there, you would simply miss the trade. But if you are trading from the edge of that heavy volume zone, it would be a winner. All right.
Now, let me show you a trade which I took earlier today. It was a trade on the USD/JPY. I think it nicely demonstrates this. So, what you see here, this is a 30-minute chart of the USD/JPY. This is the NinjaTrader 8 platform with my custom-made Volume Profile and VWAP indicators. And I was trading from this heavy volume zone. This green line is where I had my long level, at 158.17. And this was the reaction beautiful reaction. The trade lasted one minute. It was beautiful.
And if you look at the volumes, then as you can see, if I was trading from the local Point of Control, then I would miss the trade. See? I would miss it. I would be mad about missing a trade like this. But I was trading from the beginning of the heavy volume zone, and I caught it, and it was a beautiful winner. All right, so this is exactly what I’m talking about. You want to trade from the edge of the volume cluster, or the heavy volume zone, not from the Point of Control.
Now, the second mistake I want to talk about is when the market is rotating, but you are trading a trend. You know, the thing is that many traders use the same strategy regardless of what the market is doing. But if the market is rotating, you need to use a strategy for a rotating market. And if the market is trending, then you need to use a different strategy for a trending market. Many traders don’t do that. They just trade some universal strategy, and that’s that. But that’s a mistake.
Let me do a little drawing. First, I would like to draw a rotating market. So, this is a market that goes sideways. It’s rotating. And the volume profile for a rotating market looks like this. It’s a D-shaped profile, corresponding with the letter D, with the Point of Control somewhere in the middle. In this case, trading from the heavy volume zone, or from the Point of Control itself, would be a huge mistake, because when the market is rotating, it typically moves around the Point of Control. It rotates around it, but it doesn’t react to it as if it was support or resistance.
So, when the market is rotating, you want to trade from little volume bumps which are here, or here. They don’t need to be there. Often, you will find some in those two places, but if they are not there, you don’t trade it. But if there are volume clusters here or here, then you want to trade them. So that means you want to trade shorts from this line, and longs from here, like this. This is how you should trade a rotating market, right? And what you can do is use the Point of Control as the take-profit for your trades.
Okay, so that’s the rotation. But when the market is trending, it’s different. So, this is a trending market. The volume profile for this trending market could look, for example, like this, with the Point of Control being here. And in this case, you want to use that heavy volume zone as support. In this long trade scenario, it’s support. And if the price hits that, you go long here, right? So, in this case, the heavy volume zone is your level to trade from because the market is trending, and it likes to react to those heavy volume zones. See? And this is the difference between rotation and a trend, and how you need to approach those.
Now, let me show you a couple of charts here. Here is a market that is going sideways. It’s rotating. This is how the volume profile looks in that rotation. And if you look at the volume profile, then you can identify significant volume clusters this one at the top, and then there are two at the bottom. So, when it’s like this, you want to focus on trading shorts from this place, from the beginning of that volume cluster which is at the top of that volume profile, and longs either from this place or from this place.
All right, that’s how you trade the rotation. One more example, very, very similar. We have a market that is rotating, and this is how the volumes look. Now again, you want to identify those little volume bumps around the edges, which means this one, and here we have also two at the bottom. So again, you want to focus on shorts from here, and longs from here. All right, that’s how we approach a rotating market.
Now, let me give you a couple of examples of a market which is moving, which is trending. So, in here, we have a nice uptrend. Within that uptrend, we have a significant volume cluster, and you want to use this as support. So you want to trade from the beginning of it, like this. This would be the support, and you go long from there. All right, so that’s for the trending market. See? It’s quite different from a market which is rotating, and you can’t really use the same strategy for both.
Again, we have a trend here, and in that trend, we have a significant volume cluster. What you do is you print a line from the beginning of the volume cluster. This particular trade, I remember taking the short from here. I remember this because this was a beautiful trade, because I caught almost the high of this reaction and then took profit almost at the low here. It was a great trade. And yeah, I was looking into the profile like this. I consider this the heavy volume zone, so that’s why I was trading from the beginning of this. And yeah, beautiful winner here. And that’s how you trade when there’s a trend, right? If this was a rotation, it would be a completely different story, a completely different use of the volume profile.
But many traders don’t know that. They just use the same strategy all over, and they don’t really care about how the market looks, and then the results are obviously not very good.
Now, mistake number three is trading levels which have already been tested. Now, let me do a little drawing again to show you what I mean. So imagine that the price does this. This is a little uptrend. The volume profile for this would probably look something like this, with the Point of Control being here.
And if you look at it, then this looks like a simple trade, right? You draw this support line here, and when the price makes a pullback to it, you go long from there, right? Well, not exactly. This is a mistake. And the reason that this is a mistake is that this heavy volume zone was already tested in here, with this little pullback. It was a tested level. This was the first test.
All right, heavy volumes got formed in this little rotation here. The price went up, made a pullback, and tested those volumes. Boom this was the reaction. When the price approached for the second time, this level had already been tested. The volumes had already been tested. And generally speaking, you don’t want to trade second tests. You only want to trade the first test. Okay? So, that’s why you shouldn’t go long from here. You need to pay close attention to the price as well, not just the volumes.
Let me show you a couple of examples. So here we have a volume profile, and many traders would just draw a resistance line like this in here, wait for a pullback, and attempt to go short from there. But if you look at it, there was that daily volume profile formed, and the Point of Control formed here, or the heavy volume zone formed here, whatever you like to trade. But then there was a pullback, and the price tested that heavy volume zone in here. This was the first test. It doesn’t really matter if the trade would be successful or not, but this was the first test here. This is the second test, and you don’t trade the second test. Okay? So, no short from this place.
Now, let me show you this. This is a trending market, and in that trending market, there were three significant volume clusters formed. Normally, you would be trading from all of those, right? Meaning long from here, long from here, and long from here, if it got the chance, if there was a pullback. But if you look closely, those weren’t really viable trades.
Let me start with this one. Those heavy volumes formed in this rotation, but then there was a pullback almost to the heavy volume zone, and a reaction. So, this heavy volume zone is spent. Now take a look at the second one. The heavy volumes here formed in this little rotation. Then the price went up and tested that heavy volume zone. See? The edge of the heavy volume cluster, or a little bit above it, but I count it as a test. And boom the price reacted and went up. So again, this was a test. That means that if the price makes a pullback here, you don’t go long from there, because that would already be a second test, right? The volumes here got tested with this pullback here.
Now let’s take a look at the third volume cluster. Those heavy volumes formed in here. What happened next was that the price went up, but then there was that pullback. The price tested almost to that heavy volume zone, it was very, very close, and I personally would count that as a proper test. So this was the reaction to the heavy volume zone, which is now spent. The volumes were tested, right? So when the price reaches into that heavy volume zone again in the future, you don’t go long, because this would already be a second test, and it would be risky. Second tests are not as good trades as the first tests.
Okay, now this is the last example of the same thing. Take a look at this volume cluster here in this volume profile. Price goes up from that volume cluster. And normally, many traders would just go long from here. But if you look closely, then after those volumes got formed in this rotation, price made a pullback to that area, testing this volume cluster, and making a reaction. This is the first test. You can trade this, but you can’t trade this, because this would be the second test. The volumes are already tested.
So, don’t trade tested levels. Pay close attention to what the price is doing and whether volumes are tested or not, because you only want to trade heavy volume areas which haven’t been tested yet.
Now, if you guys are interested in learning more about Volume Profile trading and getting your hands on my custom-made trading indicators, you want to head over to my website. It is at Trader-Dale.com. And if you click the button that says “Trading Course” then it will take you to this page. Scroll down a bit, and in here you can browse my trading education and custom-made indicators. There are a couple of packs: Volume Profile Pack, Order Flow Pack, VWAP Pack, and Smart Money Pack. You can get those separately in here, or scroll down a bit and get a special discounted combo where I have all four packs together in one huge pack, only for $797.
Okay, so that’s about that. Thanks for watching the video. I hope you guys learned something new. I hope you found it interesting, and I’ll be looking forward to seeing you next time.
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