Unstable. That is the one word I would use to describe 2022 to this point. Most of what I’m seeing suggests we’re at the beginning of the worst bear market in history. However, my spidey senses are telling me that it won’t be nearly as bad as the experts are suggesting. Only time will tell…

With that let’s direct our attention to the Thinkorswim volume profile. This tool is quickly becoming a favorite of mine and is gaining popularity quickly amongst traders and investors.

Thinkorswim Volume Profile Contents

  • What is the Thinkorswim Volume Profle?
  • How to apply the Volume Profile to Thinkorswim Charts
  • Common Volume Profile usage
  • How I use the Volume Profile

What is the Thinkorswim Volume Profile

Volume is typically regarded as an indicator for determining if a bullish or a bearish move may continue. For example, if price of XYZ moved higher by $1 and volume accelerated well beyond the average volume then an investor may conclude that the asset is experiencing higher than normal relative volume. This could signal that investors are happy to pay the current price of XYZ and higher prices could continue. The caveat here is that it volume is shown linearly as a histogram to indicate the day, week, month etc. when volume happens.

However, what if we could use that volume information in conjunction with price or a range of prices? That’s precisely what the volume profile indicator allows for. The profile is painted on the price graph to indicate the prices at which volume occurred rather than the time it occurred, as shown below. From the price chart of Apple, notice the red line where the highest volume occurred. That is the point of control (POC) and depicts the price at which the most shares traded hands. Or said another way, the point at which the MOST buyers and sellers believed price was fair.

Thinkorswim Volume Profile on Apple Price Chart
Apple Price Chart with Volume Profile

Additionally, the image above is a 1 year chart with daily candlesticks. The volume profile can be added to any desired timeframe to see at what price volume actually occurred. Compare that with the standard volume histogram and it can provide the trader or investor critical insights into the assets price behavior.

How to Apply the Volume Profile to Thinkorswim Charts

Start by selecting the chart tab along the top ribbon.

Selecting Volume profile step 1
Thinkorswim Charts Tab

Then select the beaker icon to edit studies.

Selecting Volume Profile step 2
Thinkorswim Edit Studies

Once selected, Locate the studies search box to the left. Type “volume profile”. Find it in the resulting list and double click to apply it to the current chart.

Selecting Volume Profile step 3
Adding a Study to Thinkorswim Chart

Click ok to exit and you’ll see the volume profile is now painted on the current chart. Admittedly, this is just the beginning. With the volume profile added to the chart take some time to view different time frames and become acclimated with the information it provides. Pretty awesome, right?

Common Volume Profile Use

The first few items to identify once the Thinkorswim volume profile has been included on the chart is the two yellow lines and the red line or POC as we’ve already discussed. The yellow lines or “value area” is also denoted by yellow hue across that range of prices. Essentially, that is the range of prices where most participants were previously willing to get involved. Again, the red line or “point of control” is the single greatest point at which transactions occurred.

The value area is determined as one standard deviation for the current chart. Price could be at any point within the range or even outside the range as the standard deviation is accounting for all the volume from the selected timeframe. For example, let’s look again at the volume profile graph for Apple. Notice price is trading at the very bottom of the value area. This indicates that Apple is currently trading below the prices at which other investors believed was a fair price. However, don’t rush right out and by Apple because there is NO guarantee that it won’t continue trading lower. Simply consider the weekly chart below and you’ll see why more context is always key.

Apple Weekly Price Chart
Apple Weekly Chart with Volume Profile

This chart shows a different story entirely. Here we can gather that Apple is still well above the range of prices where even more investors believed price was fair. More, because of the longer timeframe. Thus, buying at the current price could be unfavorable as Apple might continue trading back down to the value area. As with all things, having a deeper understanding could make all the difference.

Alternative Volume Profile Use

Outside of simply using the volume profile as discussed, it is quickly becoming the day traders tool of choice to determine where price may find support or resistance. For example, consider the image of Target (TGT) below. Wouldn’t it be beneficial to know in advance at what level price may react. As is seen, Target found support earlier today at the low volume node before eventually succumbing to selling pressure and falling below. Now, as price moves back up to that level it could become a point of resistance. For the mindful day trader, this might just be an area to become bearish on the stock.

Target price chart with Volume profile for support and resistance
Target Price Chart with Volume Profile

Generally, the stock would be watched closely as price trades into that area for indications the move lower will result. Nothing is perfect, that much is sure, but without this tool in your belt the randomness of the current price level would do little to signal that price could very well reverse. When used in conjunction with other indications, identifying support or resistance with the volume profile could well be the missing piece to a successful trading session.

How I use the Thinkorswim Volume Profile

With all that cleared up, lets take a brief look at how I use the volume profile in my own trading for those that may be interested. I’ll point out here that I’ve made further modifications to the settings which can all be done from the gear icon next to volume profile on the edit studies page. I’ll avoid a discussion around it as I’m certain everyone would prefer a different look and feel to how the profile is plotted.

Texas Roadhouse Price Chart
Texas Roadhouse Price Chart with Volume Profile

This is an investment I recently made into Texas Roadhouse (TXRH). From the weekly chart I can see that Texas Roadhouse has traded back in the value area after nearly a year above it. Additionally, price is trading directly into a lower volume area where fewer participants have been willing to engage. This could be a support area but it could also be an area where the decline accelerates back to the point of control.

Given the previous price behavior and the potential support indication from the volume profile I’m of the belief that TXRH is nearing an area where it’s price may become attractive to investors. Should I be wrong, I’ll continue averaging into my position to lower my cost as it draws closer to the POC line.

To continue your study of the volume profile here is an article from OptimusFutures: Spotting Market Trends with Volume Profile Trading.

Closing Thoughts

The first thing I’d like to say is please do NOT look at the volume profile as the holy grail of indicators. It fails just as often as it doesn’t. Which as I’m sure you’re aware (or soon will be) is the nature of every indictor in existence. There simply is no tool that could predict the psychology behind human behavior and definitely not with regard to behavior concerning money.

My hope is that the Thinkorswim volume profile will quickly allow you to see what participants feel about price at different levels. Through that lens, our ability to act or not act gets a little easier. And in this never ending world of complexity I think that provides enough value alone to warrant consideration.

What do you think about the volume profile indicator? Do you have another use case? Let us all know in the comments below.

God bless,

Jeff