Hello, Trader. This chapter of “The DayTrader’s Toolbox” will cover the Cumulative Volume Delta: one of the most appreciated indicators among modern order-flow traders, primarily used for validating price microstructures.
At the end of this brief reading, you’ll know how the CVD works and how to set it up on VolSys, so that you can promptly start incorporating it into your analysis and execution practice.
At first look, Cumulative Volume Delta (CVD) is similar to the most commonly used oscillators, like RSI, MFI etc., when applied to the price chart.
Nevertheless, CVD is not an oscillator. To properly understand how it works, knowing how to read the depth of the market (DOM), understand why the price upticks and downticks, and know what “Delta” means is of prime importance. Therefore, before proceeding further, it’s advised to read this article.
In brief, the definition of Delta in the trading field is the difference between the finalised orders (market orders) between Bid and Ask.
Delta by Price is readable for every tick on the price scale on the DOM, Footprint candles, and the Volume Profile.
CVD takes the Delta by Price of each shown candlestick on the selected timeframe and sums it, showing the total Delta of finalised orders between the Bid and the Ask.
In its classical visualisation, CVD shows the total Delta for each trading session, printing out a candlestick chart similar to the price chart we’re all used to.
Each candle opens at the previous one close level, with the difference that Delta determines the bar’s pathway instead of Price.
Another way to display cumulative Delta for each candlestick is “Delta by Bar“. This visual style flattens each candle open at “zero”, showing a histogram. It is particularly useful for visualising the so-called “Single bar Divs“, which are covered later in the article.
During an unbalanced trend, CVD will tend to trend along the PA, suggesting that the aggressive market participants are in control.
Anyhow, when passive participants -aka those who provide liquidity to the market through limit orders- get in control again, CVD can show interesting patterns in the form of divergencies against the PA.
These divs can highlight events of absorption from the passive liquidity or a simple lack of interest from aggressive participants (exhaustion).
If the CVD shows a new high or low without finding any match on the main price chart, we have a so-called “absorption divergence“.
This anomaly highlights how the passive resting liquidity on the actual price level has such a high magnitude to let it be possible to absorb the market orders executed at that same level, stopping the attempt from the aggressive participants to push the auction any further.
Usually, an absorption div is a reversal pattern over the short term unless the aggressive activity insists so much to dry the resting liquidity or, on the contrary, if the passive participants decide to pull out their limit orders.
In the shown example, PA starts to consolidate after a cristal clear unbalanced and impulsive phase. At this point, Delta highlights huge market sell pressure, suggesting possible long covering (take profits) on top of some aggressive shorts opening. Nevertheless, PA refuses to follow CVD‘s turnaround by setting a higher low: this signal suggests the presence of high liquidity around the lower boundary of the consolidation range, anticipating a possible breakout attempt. After that, the Price breaks resistance and CVD turns around, showing a high activity from aggressive buyers, most probably composed of mixed conditional buy market orders placed over the level and SL triggers.
Exhaustion divergences, in brief, are the opposite pattern of absorption divs. They happen when we can spot a new high or low on the price chart without finding any match on the CVD chart. It highlights a lack of interest from aggressive market participants in pushing the auction further in the same direction, anticipating a possible short-term reversal.
In the shown example, Price shows an impulsive and inefficient phase, led by a positive CVD. Price then forms a higher high, which the CVD does not match, printing a lower high, therefore showing the lack of interest from aggressive market participants to push the bullish momentum further.
Once support is broken and retested from the other side, we can observe an efficient downtrend with control skewed toward aggressive sellers.
Single bar div
You have a single bar divergence when CVD’s candle close diverges from the respective PA candle close.
For example, if a fully developed bullish candle on the Price chart shows a negative Delta, that is identifiable as a single bar divergence.
Observing this kind of anomaly is a relatively common occurrence during regular trading hours; therefore, evaluating the overall context is necessary to interpret it as a significant signal.
A genuinely relevant single bar div usually shows a higher than average Delta.
In this example, PA diverges from what Delta is showing, even though both Price and Delta closes are positive. Delta is very high and skewed toward the positive side, with a good chunk of it composed of bigger than average market orders. While at the same time, PA is printing a doji candle. It is a clear sign of absorption: market orders executed from aggressive market participants have been absorbed by the resting liquidity, halting the bullish momentum.
VolSys‘ single bar delta indicator allows us to filter out the executed order’s size, distinguishing the “pocket size” of aggressive traders in control. There will be a follow-up article with the whole setup of this indicator with more examples.
Setting up the CVD on VolSys is quite simple:
Open the indicator list, then search and add “Delta Fitler Bars” if you’re looking for the single bar delta indicator. If you’re looking for the classic CVD instead, search and add “Cumulative Delta Candlestick“.
Single bar Delta:
- Delta is the difference between the finalised orders (market orders) between the Bid and the Ask;
- CVD shows the total Delta for each candlestick on the selected timeframe;
- CVD has two possible display modes:
- Session CVD;
- Single bar (histogram);
- Session Cumulative Volume Delta shows a candlestick chart, very similar to the classical Price chart, with the difference that the candlestick close is determined by Delta value in place of Price.
- Divergences between CVD and Price show Absorption and Exhaustion patterns.
Cumulative Volume Delta is a valuable and intuitive indicator, regardless of the chosen display mode (single bar vs session). Especially for those traders who prefer to read aggressive market participants’ activity with a different representation of order-flow dynamics than the classical DOM, Footprint or Delta Profile.
CVD anomalies are easy to spot, but they always come with some lag, which brings in some limitations:
Identifying the divergencies between CVD and PA in hindsight is very simple. Still, when we pass to real-time analysis, we risk acting late or too early on them, achieving a mediocre yield, optimistically speaking. For this reason, it’s advisable to use the CVD and its divergencies as confluence factors of sound trading setups, thought around pre-identified solid price levels through Volume Profile or Market Profile.