I was first introduced to market auction theory during a training course at a  London proprietary trading firm. Most of their big hitting traders were using time and volume profiles to help them understand market activity.

Market profile analysis is a vast topic, certainly too large to cover in depth here. I would recommend Dalton’s excellent book “Mind over markets”, for those wanting to learn more. It’s a great introduction to the theory, as well as covering advanced topics for those who are more experienced.

My favourite tool from my study into market auction theory, is volume profile analysis. To describe it in its most basic form, it is essentially volume plotted by price (on the y-axis) instead of by time (on the x-axis).

Volume-by-price plotted on the y-axis for July Crude oil

The chart above shows the first few days in the month of July, for crude oil. On the right hand side is the accumulated traded volume at each price level during those first days in July. As you can see around $48.20 and $48.90 there is a high volume of trading. Around $48.60 and $49.40 there is a low amount of volume traded.

  • The lowest areas of volume have a blue dotted horizontal line to represent them. I use this line as a representation of potential support and resistance. Where there has been low traded volume previously, is an indication of where the market historically does not like to spend time trading, and hence could be a support/resistance level
  • You can see on the chart that the market is currently approaching the $48.6 low volume line, and is finding that area to be resistance.

Volume profile can be used over any timescale. Like most indicators, the longer the timescale the more significant the levels tend to be. If you are a day trader then you will probably focus on the day’s volume profile, but it is also important to keep a note of historical volume profile levels.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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