How I Read Volume Profile: VAH, VAL and VPOC Explained

Each trade idea I publish talks about a VAH, a VAL, a VPOC. I used to explain them every time. That took space and it repeated. So here it is, in one place. Read it once. Come back when a word is fuzzy.

The method comes from Jim Dalton's Mind Over Markets and from the way I read charts every day. Any charting tool can draw it, and so does the app. It shows where buyers and sellers agree.

Price is an auction

A stock moves to find trades. It rises to find sellers and falls to find buyers. Where the two sides agree, a lot of shares change hands. Elsewhere, price moves on fast.

Volume profile draws that. It turns the chart on its side. Each bar shows how many shares traded at one price.

The fat part is where the stock spent its time. The thin ends are where one side gave up.

Four words

Every level I use comes from four words.

The value area (VA) is where 70% of the shares traded. It is the price range the market found fair.

The VAH is the top of the value area. Above it, price looks expensive. Sellers tend to show up there.

The VAL is the bottom. Below it, price looks cheap. Buyers tend to show up there.

The VPOC, the volume point of control, is the single busiest price. It works like a magnet. Price leaves it and comes back to it.

Thick and thin

Inside a profile, some prices are thick and some are thin. A high volume node (HVN) is a thick spot. Price slows down there and chops. A low volume node (LVN) is a thin spot. Price runs through it fast, because nobody wanted to trade there.

That gives me two rules. My targets sit where price likes to stop: an HVN, the VPOC, or the far edge of value. My stop never sits inside an LVN, where price can rip right through it.

The month decides, the week refines

I use two profiles. The last closed month, and the last closed week. Never the month still in progress. Its busiest price keeps moving, so it can't be a level yet.

The month is the map. My targets live on monthly levels. The week shows where the fight is right now, so my entry and my stop often sit there.

On the chart below, and in every trade idea I send, grey is last month's value area and blue is last week's.

A wick is never acceptance

This is the question that decides most trades. Price pokes above a level. Did the market accept that price, or reject it?

A rejection is a spike that comes straight back. A long wick above the VAH, then a close back inside. The new price found no takers.

Acceptance takes time. Two daily closes or more beyond the level, and the stock starts to build volume there. Then the old level has changed its job.

Where is price?

Before any trade, I ask one question. Where is price compared to value? There are three answers.

Inside value, I trade the edges. I buy near the VAL and sell near the VAH. The middle gives me no edge, so I leave it alone.

Out of value and rejected, price tends to come back in. The VPOC pulls it.

Out of value and accepted, I follow the move. Fighting an accepted move costs a lot of money.

The 80% rule

This is the setup I like most. Price falls out of the value area. It can't stay out. It gets back in and holds there.

Then price often travels all the way across. First to the VPOC, then to the other edge. Dalton calls it the value area rule. Traders call it the 80% rule. The old rule of thumb says it plays out about 4 times out of 5.

The key word is holds. One close back inside is the first sign. Then I want to see price stay in. I treat the 4 in 5 as a tendency.

A level wears out

A level is a pile of waiting orders. Each test eats some of them. The first touch of a VAL usually brings a strong bounce. The second one is weaker. By the third, I get careful. That is often when the level breaks.

So I prefer a fresh level.

From the map to the plan

Entry, stop and targets all sit on a level. Here is how one plan comes together.

Last month's value ran from $95 to $105. The VPOC sat at $100.

The stock broke under $95. Buyers built a new floor there for a week, between $92 and $95.

Then it closed back above $95. Twice. Sellers couldn't keep it out. That is the 80% rule setting up.

Here is how I'd play it.

Entry: $95, after the second close back above the month's VAL.

Stop: a daily close under $92, last week's VAL. That is about 3% of risk.

Target 1: $100, the VPOC. About 5% up, 1.7 times the risk. I sell half there and move my stop to my buy price.

Target 2: $105, the far edge of value. About 10% up, 3.3 times the risk.

One daily close under $92 and I sell. The setup is dead.

Timing comes from elsewhere

Volume profile gives me the levels. The timing comes from the rest of my work: the news, the sector, the options flow and the screeners.

See it on any stock

In the app, open any stock, click Layers on the chart, then Value zones. The value area, the VPOC and the volume at each price show up on the chart, updated every night.

Daniel