- Volume Delta Indicator is a powerful tool for order flow traders.
- It is based on volume analysis and indicates the difference in buying and selling aggression.
Traders use several types of trading strategies like order flow analysis, technical analysis, fundamental analysis, and sentimental analysis. The choice depends on the nature of the market and the trader. Order flow trading goes back to the bucket shops and pits of exchanges, where the traders would depend on hand signals and open outcries to put up their orders in the market.
They wear bright and colored jackets to distinguish them from other firms or represent the exchanges they are working for. An expert trader back then had to be good at reading the crowd, interpreting the moves of big players together while staying calm in the chaotic surroundings.
However, with the advancement of technology and the coming up of new algorithms to read the markets, many traders left the floor and adopted electronic trading. Those who could not go along and learn the news art were simply left behind in the game.
The introduction of Level II Quotes was a major leap in technology, where all the offers and bids were displayed from every Electronic Communication Network (ECN). These Level II Quotes became the new notion of order flow trading.
The core philosophy behind order flow trading is the Auction Market Theory (AMT). This theory says that the market swings up or down because of a lack of balance between the buyer and seller aggression. This happens till the price finds a level where this aggression is balanced.
Using AMT traders can learn to react to events and market data rather than predict them in advance using other methods of analysis. There are several indicators such as Depth of Market (DOM), Time and Sales, Liquidity Charts, and Volume Analysis. Volume Delta and Cumulative Volume Delta are some of the most popular advanced indicators for order flow trading.
Volume Delta
This indicator gives you an instant picture of buying and selling pressure in the market behind a price. It allows traders to spot market reversals and have an edge over other traders. The difference in the volume that is traded at the offer price and that traded at the bid price gives an idea of the buying and selling power.
Volume delta = Buying Power – Selling Power
If the delta is greater than zero, it indicates more buying power. If the delta is less than zero, it indicates more selling power. Sometimes if both are equal it may be equal to zero. Thus, this indicator comes under the oscillator-type indicator and swings around zero. The strength of the buy order (positive delta) or sell order (negative delta) is reflected in the distance between the delta and zero line. Traders use volume delta to look for divergence or boost confidence in their trade.
Cumulative Volume Delta (CVD)
This indicator takes the delta value from each candlestick and adds them to provide a more visually appealing and easy-to-understand chart. The Delta Volume Indicator allows traders to study the market on a bar-to-bar basis, while the CVD indicator provides buying and selling aggression on swing highs and swing lows. If there is more selling than buying, it is a bearish signal and CVD points down. Similarly, during a bullish signal, there is more buying than selling and the CVD points above.
Final Thoughts
CVD indicator can be used to spot exhaustion in the market i.e. a scenario when few sellers are willing to sell at a new low or few buyers are willing to buy at a new high. Open fellow traders can include this powerful tool in their arsenal to practice better trades. The most popular platform for traders, Tradingview offers this indicator in a premium version. However, as with any indicator, it takes practice and attention to detail to learn the crux of the market.