How to Read Volume Profile and VWAP: POC, Value Area and Anchored VWAP

Volume on the price axis, not the time axis

The volume bars always shown below a chart give volume for each bar, that is, over time. A volume profile takes the same period's volume, restacks it by price level and draws it as horizontal bars. It is a tool for seeing not 'when was a lot traded' but 'at which prices was a lot traded'. A price zone with heavy trading means many people bought and sold at that price, so it is interpreted as likely to act as support or resistance when price comes back to it. Volume over time is covered in the article on reading trading volume.

POC, value area and low-volume nodes

The four things to look at first on a volume profile are listed below. Of these, the value area starts at the POC row and expands by adding one neighboring row at a time, whichever of the rows above or below has more volume, until it holds 70% of total volume; its top is called the VAH and its bottom the VAL. 70% is commonly explained as a convention matched to ±1 standard deviation of a normal distribution (about 68%). Price zones where the bars are thick are commonly called high-volume nodes, and zones that are nearly empty are called low-volume nodes; as in the figure, a stretch that price passed through quickly is left behind as a low-volume node.

• POC (point of control): the price row where the most volume has built up
• Value area (VAL to VAH): the zone holding 70% of total volume
• High-volume node: a price zone where volume has built up thickly
• Low-volume node: a price zone where there was almost no trading

A profile built from candles is an approximation

An exact volume profile needs the price and size of every trade, but charting tools usually calculate it from candle data. A single candle holds only its total volume and its high and low, so there is no way to know at which prices within the bar the trades took place. This site's Volume Profile Chart spreads each bar's volume evenly from its low to its high and divides it into price rows (by default 500 4-hour bars and 48 rows). So for a bar with a long wick, volume is spread evenly across the whole span, even if little actually traded at the tip of the wick. Some tools, like TradingView, split it using shorter bars, but that is still an approximation.

VWAP: the volume-weighted average price

VWAP (volume-weighted average price) is the average price of trading from a chosen starting point up to now, weighted by volume. The calculation is below. Prices from bars with heavy trading count more in the average, so it can be seen as close to the average cost of all the volume traded over that period. That is why price above VWAP is sometimes read as meaning that those who bought during the period are in profit on average, and price below it as meaning they are at a loss. TradingView's VWAP also uses this typical price by default, but switching it in the settings to another price, such as the close, changes the value slightly.

• Typical price = (high + low + close) ÷ 3
• VWAP = Σ(typical price × volume) ÷ Σvolume
• Σ means adding up from the starting point to the current bar

The starting point defines VWAP

VWAP changes completely depending on where you start adding. In stocks, the daily VWAP that adds up from the market open is the default, but crypto trades 24 hours a day and has no market open, so a daily reference time has to be chosen. Midnight UTC, the time Binance daily candles use, is a common choice, and weekly and monthly VWAPs are used too, as are anchored VWAPs that start from a specific event, such as the bar where a sell-off began. As the figure shows, the farther from the starting point, the more volume has built up and the less VWAP moves, so a VWAP from an old starting point barely reflects recent moves.

The idea that price moves quickly through low-volume nodes

There are two common ways to read a volume profile. In price zones where volume has built up thickly, many people want to buy and sell, so price tends to linger or stop; in low-volume nodes where there was almost no trading, there are few orders to catch price, so it tends to pass through quickly. Some traders also hold that when price moves back into the value area from outside, it often travels toward the POC. The Support & Resistance Finder shows the volume density of each zone for the same reason. All of these, however, rest on the assumption that past trading carries over into future orders, and there is no guarantee that anyone is still paying attention to those prices.

What volume profile and VWAP do not tell you

Volume profile and VWAP are both summaries that organize past trades by price. They show where there was a lot of trading, but not whether that trading was aggressive buying or selling, because every trade has both a buyer and a seller. Volume is also counted separately on each exchange, so one exchange's volume profile reflects only that exchange's trades. Changing the range, the number of price rows or the bar length also changes the POC and the value area, so the lines from any one setting are better treated as rough price zones than as exact prices.