Understanding Cumulative Volume Delta and Its Trading Applications
Cumulative volume delta (CVD) is a powerful trading indicator that provides insights into order flow and buying/selling pressure in a market. By tracking the cumulative difference between volumes traded at the bid and ask prices, CVD helps traders understand who is in control – buyers or sellers.
In this comprehensive guide, we will cover everything you need to know about cumulative volume delta, including:
What is Cumulative Volume Delta?
Cumulative volume delta (CVD) measures the total net difference between volumes traded at the bid price (selling pressure) and volumes traded at the ask price (buying pressure) over a specified time period.
It is calculated by taking the volume traded at the bid price and subtracting the volume traded at the ask price for every trade in the specified time period. These delta values are then cumulated – added together to show the cumulative net buying and selling pressure.
Positive CVD values indicate net buying pressure, while negative CVD values indicate net selling pressure. If CVD is rising, it signals increasing buying pressure. If it is falling, it signals increasing selling pressure.
Key Benefits of Using CVD
Here are some of the main benefits of using cumulative volume delta in trading:
- Provides insights into order flow and buying/selling pressure
- Identifies support and resistance levels
- Signals changes in market sentiment
- Spots divergences with price action
- Confirms breakouts and breakdowns
By analyzing CVD, traders can gain an edge in detecting shifts from buying to selling pressure and vice versa ahead of price moves. This allows them to enter trades early and in the direction of the impending move.
How to Calculate Cumulative Volume Delta
CVD calculation involves just a few simple steps:
- Record the volume traded at the ask price for the time period (buying volume)
- Record the volume traded at the bid price for the time period (selling volume)
- Subtract the bid volume from the ask volume
- If ask volume is higher, the delta will be positive, indicating net buying pressure
- If bid volume is higher, the delta will be negative, indicating net selling pressure
- Add the current delta to the previous period’s cumulative delta to get the updated cumulative volume delta
The process then repeats for the next period. By accumulating the deltas, CVD provides a running total of net buying/selling pressure over time.
Platforms like Bookmap and Sierra Chart include built-in CVD indicators that automate this calculation process for ease of use.
Trading Applications of CVD
Now that we understand what cumulative volume delta is and how it is calculated, let’s explore some of its practical trading applications.
1. Identifying Support and Resistance
By analyzing CVD, traders can identify key support and resistance levels in a market.
When CVD reaches extreme positive or negative values and then starts to reverse, it often signals that price has hit an area of support or resistance. Monitoring these potential reversal points allows traders to define price levels where buyers/sellers tend to enter or exit positions.
2. Spotting Divergences
Divergences between CVD and price action can signal that a reversal may be imminent.
For example, if price is making new highs while CVD is failing to reach new extremes, it indicates that buying pressure is waning. This bearish divergence suggests that the uptrend may be nearing exhaustion.
Traders can take advantage of these divergences by entering counter-trend trades in the direction of the impending reversal.
3. Confirming Breakouts and Breakdowns
Analyzing CVD can help traders confirm whether a price breakout or breakdown is likely to continue.
For instance, if CVD is trending strongly positive as price breaks out above a resistance level, it confirms that buyers are in control and uptrend continuation is likely. Traders can use this confirmation to enter long positions.
4. Identifying Exhaustion Moves
Tracking CVD also allows traders to identify terminal market moves near tops or bottoms.
As a trend nears its end, CVD will often show a final burst of momentum (positive or negative) due to emotional buying/selling. However, this will not be confirmed by price registering new extremes.
Identifying these CVD exhaustion spikes can signal ideal reversal entry points.
5. Analyzing Intraday Trends
CVD is valuable for analyzing intraday trends across different time frames.
Monitoring the dominant CVD direction (positive or negative) on 1-minute, 5-minute and 15-minute charts allows traders to gain insights into order flow and which side is in control at multiple points during the day.
This enables traders to properly time entries and exits based on the prevailing intraday bias.
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Trading CVD Divergences with Oscillators
Since CVD divergences with price are such valuable trade signals, traders often use oscillators to identify them objectively.
Oscillators like the Relative Strength Index (RSI) and Stochastics can visually confirm CVD divergence signals when they are also diverging in the opposite direction of price.
Here are step-by-step instructions for trading CVD divergences with an oscillator:
- Spot a divergence between CVD and price
- Confirm the divergence with a corresponding opposite divergence on the oscillator
- Enter a trade when the oscillator divergence exceeds a defined threshold
- Set initial stop based on recent price extremes or key support/resistance levels
- Trail stop below oscillator highs/lows or CVD extremes
Combining CVD with oscillators provides objective entry and exit rules for trading divergences. This eliminates guesswork and the need for visual interpretation of chart patterns.
Tips for Effectively Using Cumulative volume delta
Here are some tips for getting the most out of cumulative volume delta when trading:
- Use CVD in combination with other indicators – CVD should not be used in isolation but combined with price action analysis and other indicators like moving averages, oscillators etc. to validate signals.
- Focus on inflection points and reversals in CVD – The most valuable signals occur when an extreme positive or negative CVD reading reverses direction.
- Do not expect perfection – Even valid CVD signals will not work 100% perfectly. Manage risk accordingly.
- Adjust CVD calculation periods based on trading timeframe – Use shorter CVD periods like 10-30 bars for short-term trading, or longer 100+ bar periods for swing trading.
- Trade with the directional CVD bias – If CVD is positive, adopt a bullish bias and vice versa. But allow for counter-trend trades if a clear opportunity presents.
By incorporating these best practices, traders can make the most of cumulative delta’s unique order flow insights.
Cumulative volume delta Conclusion
In summary, cumulative volume delta is a valuable indicator that reveals buying and selling pressure within markets. It provides traders with an intangible edge by highlighting shifts in order flow ahead of price moves.
When combined with effective risk management, trading tools like Bookmap’s CVD can significantly enhance trading performance. Mastering indicators such as CVD represents the difference between gambling and professional trading.
So if you are not already utilizing cumulative volume delta in your trading, now is the time to start! Add it to your charting platform and observe how its signals correspond with support, resistance, trend continuations/reversals and divergences in the markets you trade. Over time you will internalize how to best apply CVD in your own trading system.