CoinMarketCap dives into Volume Delta, an order flow indicator that provide real-time insights into the buying and selling pressure in the market.
- 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.
Delta generally is used to describe the difference between two things, or the rate of change between two data points.
What Is Volume Delta?
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.
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.
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
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.
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
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.