What Is Volume Delta? The Ultimate Order Flow Indicator
Trading Analysis

What Is Volume Delta? The Ultimate Order Flow Indicator

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Created 8mo ago, last updated 8mo ago

CoinMarketCap dives into Volume Delta, an order flow indicator that provide real-time insights into the buying and selling pressure in the market.

What Is Volume Delta? The Ultimate Order Flow Indicator

Table of Contents

TL;DR:

  • Volume Delta is a tool used in forex, stock and crypto markets to analyze order flow and spot potential reversals.
  • It measures the difference between buying and selling pressure and can indicate the strength of buy or sell orders.
  • Cumulative Volume Delta adds up delta values to generate an indicator that helps analyze buying and selling pressure at key swing highs and lows.
  • Cumulative Volume Delta can be used to spot trend shifts and exhaustion in the market and can help manage open trades.

Introduction

Volume Delta is a popular technical analysis tool that helps traders in forex, stock and crypto markets understand the order flow.
Volume Delta and Cumulative Volume Delta are two powerful trading indicators used by market participants who wish to analyze order flow. The tools provide real-time insights into the buy and sell volumes in a market and allow you to spot potential reversals.
Delta generally is used to describe the difference between two things, or the rate of change between two data points.

What Is Volume Delta?

Put simply, Volume Delta is the difference between buying and selling pressure, calculated on a per candle basis, and therefore may vary per time frame. It is an oscillator-type indicator, meaning that the volume delta revolves around zero.

When the delta is positive, there is more buying than selling volume. A negative delta implies selling volume is higher than buying volume. In some cases, when the buying and selling volumes are equal, the volume delta is zero.

How To Analyze Volume Delta?

The distance between the volume delta and the zero line indicates the strength of buy orders (positive delta reading) or sell orders (negative delta reading). Especially when comparing the volume delta to price action, traders can look for divergences or use the volume delta to add more confidence to their trade.

For example, if a trader is interested in shorting, a negative volume delta will add more confidence to the trade, as it means that the market is more interested in selling than buying.

What Is Cumulative Volume Delta?

Cumulative Volume Delta (or CVD) is a handy tool that takes the delta values for each candlestick and adds them together to generate an easy-to-understand indicator. While the regular volume delta is a great tool to compare deltas on a bar-to-bar basis, the cumulative volume delta allows traders to study the selling and buying pressure at key swing highs and lows.

If the CVD indicator is pointing down, it means there is more selling than buying pressure – which is generally considered a bearish signal. Contrarily, it is considered bullish when the CVD points up. This information becomes relevant when you compare it to the price movement or market structure.
As a refresher, market structure tells you the direction of the price of an asset by looking at the key turning points. A series of consecutive lows and highs are studied to determine the overarching market trend. When higher highs and higher lows are printed consecutively, the market is in an uptrend, and lower lows and lower highs are seen as a downtrend.

How To Spot Trend Shifts With Cumulative Volume Delta?

When comparing the cumulative volume delta to market structure, you will generally notice the two of them pointing in the same direction.

For example, new lows in price generally result in a breakdown on the cumulative volume delta, meaning that more people are interested in selling than buying. This makes sense because it takes good selling pressure to break a swing low.

However, what happens when the price manages to break the low, but the cumulative volume delta pushes higher? This is generally considered a sign of a nearing trend shift, as (in the case of the example) the selling pressure is getting exhausted, and buyers are starting to step in.

Without cumulative volume delta, any breakdown of price wouldn't help the analysis. On the other hand, spotting CVD divergences (divergences between CVD and price) will tell you to be on the lookout for a trend reversal.

Note: Generally speaking, the CVD is most accurate in the lower time frames (4h and below).

How To Use Cumulative Volume Delta in Trading?

There are two main uses for CVD in trading, and both involve searching for discrepancies between the behavior of price and the behavior of the cumulative volume delta.

Trading Exhaustion With Delta

Firstly, CVD is perfectly suited to spot exhaustion in the market. Let’s take an example of the market where BTC made new highs in price, but the CVD did not push higher along with it, showing a lack of buyer interest despite the new highs. Most traders interpret this signal as buyer exhaustion, which usually means a sell-off is nearing.

In an opposite scenario, the price makes a new low, but CVD fails to do so. This is generally seen as seller exhaustion, and a bounce usually follows.

Trading Absorption With Delta

Another use case of CVD divergence is found when CVD aggressively breaks a previous low or high, while the price holds strongly. This is viewed as the absorption of the buying or selling pressure.

For example, if Ethereum’s CVD pushes higher aggressively without ETH price breaking its recent highs, sellers are also believed to be absorbing the pressure. This generally results in a sell-off when the buyers run out of juice. Alternatively, if Bitcoin stays put while the CVD takes a nosedive, it is seen as buyers absorbing the selling pressure. When the selling stops, Bitcoin generally trades higher.

Cumulative Volume Delta and Trade Management

In addition to using cumulative volume to spot potential reversals, you can also use it to help manage your open trades. Instead of using the concepts of absorption and exhaustion to fuel new trades, you want to look for these signs to potentially exit your trades.

For example, if you are in a long trade, and the price makes new highs without CVD doing the same, you might want to take profits on your position, as it indicates exhaustion. If you use the CVD to trade, it is recommended to keep a close eye on it for exhaustion or absorption signs to manage your trades well.

Cumulative Delta Indicators

If you wish to use a cumulative delta indicator in your crypto trading, there are two main places to go. As most traders are familiar with TradingView, we are happy to report that the popular charting suite has CVD indicators in the library.

Nevertheless, many traders prefer using Coinalyze to analyze the cumulative volume delta, claiming that this platform has access to more accurate data. It is best to determine for yourself which platform you prefer.

We wish you the best of luck in refining your trading strategies, and we hope this article proves to be useful on that journey.

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.

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