FVG and Volume Profile: Identifying High-Volume Node Support/Resistance

Setup Description

This strategy combines the precision of Fair Value Gaps (FVGs) with the contextual market information provided by Volume Profile. Volume Profile is a effective tool that displays the traded volume at each price level over a specific period. This allows us to identify areas of high and low liquidity, which can act as effective support and resistance levels. The core of this strategy is to look for FVGs that form in confluence with high-volume nodes (HVNs) on the Volume Profile. An HVN is a price level where a large amount of volume has been traded, indicating a significant area of interest for institutional traders.

When an FVG forms near an HVN, it creates a effective confluence of support or resistance. The HVN acts as a magnet for price, while the FVG provides a precise entry point. This combination allows for a high-probability trade with a clear and objective entry and exit plan. The strategy is particularly effective in trending markets, where the price is pulling back to a key area of support or resistance before continuing in the direction of the trend.

Entry Rules

Long Entry:

1. Identify a clear uptrend on the 5-minute or 15-minute chart.
2. Use a Volume Profile tool to identify a high-volume node (HVN) that is acting as support.
3. Look for a bullish FVG to form just above the HVN.
4. The entry is triggered when the price retraces into the FVG and tests the HVN.
5. A limit order is placed at the confluence of the FVG and the HVN.

Short Entry:

1. Identify a clear downtrend on the 5-minute or 15-minute chart.
2. Use a Volume Profile tool to identify a high-volume node (HVN) that is acting as resistance.
3. Look for a bearish FVG to form just below the HVN.
4. The entry is triggered when the price retraces into the FVG and tests the HVN.
5. A limit order is placed at the confluence of the FVG and the HVN.

Example: Long Entry on AMZN

Amazon (AMZN) is in an uptrend on the 15-minute chart. A Volume Profile analysis shows a high-volume node at $180. A bullish FVG forms between $180.50 and $181.00. The price retraces to $180.50, testing the HVN. A long entry is taken at $180.50.

Exit Rules

Profit Target:

• The primary profit target is the next significant HVN on the Volume Profile.
• A secondary target can be a 2R multiple of the initial risk.

Stop Loss:

• The stop loss is placed just below the HVN for a long trade, or just above the HVN for a short trade.

Profit Target Placement

Profit target placement for this strategy is based on the Volume Profile. The next HVN is the most logical target, as it represents the next area of significant liquidity where the price is likely to react. You can also use the Point of Control (POC), which is the price level with the highest traded volume, as a profit target.

Stop Loss Placement

The stop loss for this setup is placed just beyond the HVN. A break of the HVN would invalidate the setup and suggest that the trade should be exited. This placement provides a clear and objective point of invalidation for the trade.

Risk Control

• Max Risk Per Trade: Adhere to a strict 1% risk per trade.
• Confirmation: Look for a clear rejection from the HVN before entering. This could be in the form of a bullish or bearish pin bar.
• Timeframe: This strategy can be used on any timeframe, but it is most effective on the 5-minute and 15-minute charts.

Money Management

Position Sizing:

Calculate your position size based on the distance between your entry and stop loss, ensuring that you do not risk more than your predetermined percentage of capital.

Scaling In/Out:

• Scaling In: Not recommended.
• Scaling Out: Consider taking partial profits at the next low-volume node (LVN) on the Volume Profile.

Edge Definition

The edge of this strategy comes from the confluence of two effective technical analysis tools: Fair Value Gaps and Volume Profile. By combining these tools, we can identify high-probability entry points with a high degree of precision. The strategy is also highly objective, with clear rules for entry, exit, and risk management.

• Win Rate Expectation: This setup can achieve a win rate of 60-70%.
• Profit Factor: The expected profit factor is between 1.8 and 2.5.