Transcription
The world of order flow and volume analysis is one of the best places for a day trader to find an edge because it provides a clear understanding of who is in control in the market, who is really moving it, who is blocking it and how.
Volume not only makes you understand participation or how much institutional interest there is in a certain movement, but also is the effort in one movement being satisfied or being absorbed. And all these crucial data points can give you an informational edge that price action simply can't provide.
And one of my absolute favorite order flow tools is the cumulative volume delta or CVD, which is technically an indicator, but it's not a stochastic oscillator or a moving average. It's pure raw order flow data. The cumulative volume delta gives you a raw indication of market pressure and slight divergences in market pressure can often anticipate price reversals.
But writing this video, I checked some videos on YouTube about CVD and I've seen so many misconceptions about the use of this tool. So today, not only I will delve deep into what CVD actually is, and how you can use it to boost your edge, but also how not to use it, where it can give false signals, and most of all, how to give it a context with my top one favorite order flow tool, which is order flow candles or footprints.
This video is only one of a series of videos that I'm making about order flow. I'll leave you the playlist up here or in the description down below if you want to check it out. And if you know zero about order flow, you might want to check out that one first cuz to see this video, you kind of have to understand some basics.
So let's take as an example a normal footprint candle. As you know in this part of the candle we have all the aggressive selling that sold to the passive buyers of the book. In this part of the candle we have all the aggressive buyers that have bought the contracts that were sold in the ask by passive sellers. So again this is traded in the bid and this is traded in the ask side of the market.
The formula of delta is nothing more than the difference between ask traded minus bid traded. So if the total volume traded in the ask is six is 5 + 1 + 2 + 3 which is 11. The volume traded on the bid is 15. So the total volume traded in the candle would be 26 and the delta would be minus4. So the delta is showing us that aggressive sellers in this side of the candle were more present than aggressive buyers in this side of the candle by a total value of minus4 contracts.
Or if you use the delta percentage which is total delta divided by total volume * 100 the delta percentage would sit around at 15%. So a 15% majority of sell aggression to buy aggression. So in this candle overall there was more seller which were ready to accept lower and lower prices to get filled than buyers were. So let's say this is actually a bearish candle. A bearish candle with this delta shows us that actually in all of this candle sellers are driving the auction lower and lower.
Let's look at an actual example. Let's go to our order flow chart. And as you can see these candles are pure candles. So we're going to add some indicators. And if we zoom in, we see that we have actual order flow. Let's make it a little bigger for you guys to read. So this is footprint candles or order flow candles. Another thing we can add is order flow values. And as you can see, this shows us exactly those values that I told you about. The total volume of each candle, the total delta volume of each candle, and the total delta percentage of each candle.
So if we zoom out completely. So as you can see in an initiative candle you usually have 26% delta because you have a lot of buying pressure inside of that candle. Even in this candle which started as a very prominently sell candle actually closed with a very strong rejection. Still buyers here were not as present as sellers. There was way more selling pressure on this candle. And there might be situations where even a bullish candle might have a low delta which makes us understand that something is starting to change in the auction and we might soon reverse as we actually did. So this is the first idea of divergence.
Look at the sell candle as an example. If you look at this sell candle, it has actually buying delta but it's overall not really unbalanced because we have only 4% delta. It's not a lot. Real initiative candles like this one instead has at least 10% delta. That's my way of assessing if a candle is the beginning of a real new initiative. In fact, after this very initiative candle, we go lower and lower. But here, even though there was a high delta of buyers, we can see that most buyers were actually absorbed on this level. So, the true selling pressure was here where sellers were blocking the rise of buyers. Then the buyers did some momentum ignition before giving up again. So, we always have to contextualize what's happening in the footprint. Where is the actual absorption happening. So even though there is a high delta, sellers are still in control in this candle. That's why as you will see later on this video, we need to contextualize delta with what's happening inside a candle.
Now this is the delta for every singular candle. But what if we could take this delta and have it in a chart that makes it more easy to understand and more easy to identify divergences without looking at the actual numbers? We can do it with an indicator called cumulative volume delta. Which is the cumulative version of the delta we just learned. We will take the candlesticks because they're much easier to look at. Here it is. This is the cumulative volume delta.
And as you can see, even without looking at the candles, we can see that this candle was very prominently sell pressure, but also a lot of buy pressure. Like this candle in 1 minute didn't really go anywhere. It moved like eight ticks. It was just a low liquidity spike. Still, it has a low delta. And as sellers move price lower and lower, we see this selling pressure is still going on. But the low of this candle and the low of this candle comparing them here are actually very divergent like this. This can mean there was not a lot of participation in this movement or that there was a lot of sell participation in this movement that was so there was a lot of effort from seller to go down as we can see from the delta but buyers were resisting in the book and absorbing all of this. So this type of divergence where price can't break but delta breaks. So we have this situation or here price can't break but delta breaks. So we have this divergence is called an absorption divergence.
And as we keep going in the next part of the chart as you can see this low which is this low and this low which is this low are pretty divergent. Why is that so? Why if price is rising the pressure is actually sellers? Well, my friends, this happens because sellers were the one who were trying to push down price. So, they were the one who were actually making an effort in all of this area by pushing price down and hitting all the contracts in the bid side of the market. But all of their effort was not enough to push price lower, which means they have been absorbed by buyers. This is another divergence. And when a real good initiative candle can be this one or can be this one start happening into the market that's the first buy signal that buyers are not only in control of seller aggression but they are starting to be the ones who are actually pushing price higher.
So this is what happens when delta and price are converging. Let's see another example here from the previous session. We can see that this low has been plotted then a new low is being plotted. So this and this, we're still convergent. But what happens here is really interesting because we in this move are pushing price lower until we reach exactly the same level of this low over here. So these lows are equal, but these lows have a different divergence. This selling pressure and selling participation and this buyer participation are way higher than sellers participation in this part of the movement. Sellers are not really trying a lot here. So without a lot of effort they're able to push price lower which means that there is a lower level of participation in this movement both from buyers and from sellers. This is a signal of exhaustion in market selling selling pressure and another signal for reversals.
So when price goes low even breaks the previous low but the CVD doesn't it means that in this impulse there is less participation less interest and in general a lack of participation. So this is our divergence. Same if the price is getting higher but the delta isn't. This is a sign of lack of participation in the last bullish movement which indicates an exhaustion in buyers.
To summarize in an absorption phase price will not be able to push. So we will not have higher highs but CVD will keep making higher highs because there's a lot of effort. A good example of this is icebergs. We talked about icebergs in the previous video and usually an iceberg will have this sort of price action where price action every time they get here on this level all the buying pressure is being absorbed. This is price. The CVD of an iceberg will look something like this. Something like this where buying pressure keeps getting higher and higher but all that pressure is being absorbed on this level. Okay. So, this is a clear signal that there is an iceberg order like it's an extra confirmation.
A lack of participation instead is a moment where price actually breaks but in that breakout there is no interest there is no pressure. So the CVD goes something like this. Participation gets lower. Another examples and this can mean an exhaustion in sellers and this mean an ex and this can mean an exhaustion in buying pressure but a very common a very common exhaustion example which is the stop run or the failed auction normally a failed auction will look something like this but a stop run where let's say price is doing something like this so we have a lot of buying pressure here normally even though it's an exhaustion type of pattern exactly like a lack of participation the delta will also be something like this. Okay. So, we will see a lot of participation and absorption at the same time that will push the CVD higher because there is a lot of actual buying pressure.
And always remember CVD always means aggression and absorption at the same time because if there is a lot of buying on this level, the delta will go higher. So yes, there is a lot of aggression but this aggression can also be completely absorbed. So yes, there is a lot of absorption but there's also a lot of aggression. So there's always this two sides of the coin. That's why we always have to give it a context with price action and look at where there can be a divergence.
But an important thing to remember is that these things work only for very short-term divergences like the one we saw where we go into the detail in the one minute chart and look at divergences. But trying to look at bigger size divergences like taking five or six swings in the market can be sometimes a little deceptive. So I'm kind of laughing where I see a whole session going down, going down, going down, but the delta is keep going up. So it's a huge divergence. So you know the market has to run back up. That's not how it works. You should always look for divergency in the smaller parts of price action, not throughout the whole session because throughout the whole session, a divergence in delta is not necessarily indicative of an anomaly in market pressure. But it might just mean that institutional activity was more present in the passive side of the book rather than in the aggressive side of the book. So due to this institutional algorithmic activity, you might have this session where the just delta keeps going up while the price is clearly bearish. But but if you zoom in and if you look at actual divergences in a lower time window, that's where you get an actual advantage from these.
This is a clear lack of participation in this movement which means an exhaustion in seller selling pressure and in fact we run back up. I personally use this cumulative volume delta for short-term divergences at the beginning of the session. So for example, I will put myself at the beginning of a session and look for divergences. In this session particularly, we didn't really have any divergences in the upper part. We only have a divergence with this two candles as you can see. Nothing really crazy. But probably here, as you can already see, the point of control of this candle is right here. The delta is long. And I see already a very very green slot here, which means that there's there's probably going to be a huge absorption of buying pressure by passive sellers. And as we can see, there is there was an iceberg order here that absorbed this attempt of buyers to push price back higher, which completely failed. So this means full selling pressure for me both on the aggression side and on the passive side. So even though this is a diverging candle, this is telling me the exact same information as a completely short candle with full aggression and full delta. For me, this is not meaning that we're going to bounce back up. This for me means that we're going to continue going back lower. That's why I always give it a context. And as you can see, this was the beginning of a whole short session. So we go short for the whole session.
Let's see what happens at the end of this session. As you can see here, the two swings were vastly divergent. If we go inside here, we already saw here we had a lot of buy buying pressure, but price kept going lower. Here we had a convergence in price and delta. But once we start running back up a little bit, we have a new divergence here with seller being absorbed in this part of price action. And when the next candle comes up, this is the initiative candle. This can be an entry signal. So this is how I use cumulative volume delta. Try to implement it also in your strategies in specific areas at specific times in your price action patterns and see how it works. And if you have any feedback on this tool, if you've back tested it, if you've used it, leave a comment. If you like this video, leave a like and a follow. And I'll see you in the next one. Chop.