CVD: Cumulative Volume Delta

Alright lets break this thing down.

Definitions & Explainer

CVD is an order flow indicator.

Order flow is a type of trading strategy. Other strategies include technical, or fundamental analysis.

When we look at order flow, we are analyzing the flow of trades being placed by other traders on a specific market. This is done by watching the Order Book and also footprint charts.

Order flow trading is typically used as a short term trading strategy as it is used to enter the market accurately based on recent executed buy and sell orders.

So back to CVD, it adds another layer on top of just basic volume. It lets us compare aggressive vs passive orders. You're looking for the point at which aggressive orders take control of a move.

Here is an example of what a chart incorporating CVD looks like;

Here we actually have 3 types of CVD, you can use either 1, or all 3.

Blue = Perp CVD

Green = Spot CVD

Yellow = Aggregated (average) CVD

Why bother with a separate indicator for Spot vs Perp? Well, a healthy move is usually a spot driven move, so if spot is declining it might be indicative of a move you want to fade - though of course the spot market selling may be being absorbed by limit buying.

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There are 2 main order types; (see Market Microstructure for more on this)

- Limit orders: Price points where traders have ordered to buy or sell a stock, these orders will not get executed unless the price of the market hits their limit order price point. Also referred to as passive orders. "Buy when price falls to the price I want to buy at."

- Market orders: A market order is an order to buy or sell a stock at the market's current best available price. A market order typically ensures an execution, but it doesn't guarantee a specified price. "Buy now."

Market orders are 'aggressive' orders. Limit orders are 'passive' orders.

CVD is showing us market buyers and market sellers. That means; sellers using a market order to execute their trades.

Now remember, a stop-loss is usually a market order!

If CVD is going upwards, there are more market buyers than market sellers, and vice versa.

So when using CVD, we must think about in what scenarios people are most likely to use a market order.

- when chasing a trend/breakout

- when getting stopped out

Here are some platforms that utilize order flow;

Aggr (free)

Coinalyze (free)

ExoCharts (paid)

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Strategies

Now as we've said, CVD is an added layer. It helps you know whether to take the setup you've got. You don't trade CVD on it's own, you use it with your structure and other technical tools. It is extra information that can help us determine if our setup is viable or more likely.

Absorption: Price makes a higher low but the CVD indicator makes a lower low.

What does this mean? Market selling is increasing, while price is going up. Someone is absorbing (with a limit buy) all of that selling. When the market selling is done, price should move upwards.

This happens on the way up also. Price makes a lower high while CVD makes a higher high. This tells us more market buy's are hitting the tape, while price isn't responding in tandem. Market buys are being absorbed by limit sells and price is liable to move lower.

(Price is making Higher Lows or Lower Highs - reversal - and CVD not agreeing)

Interpretation: Lets imagine price is rising and CVD is falling. What is happening? If price is rising and delta falling (so we have more market sells relative to market buys), it means that buyers are passive in the move higher - they are progressively raising their limit orders. Remember, the only way price actually moves is when market orders meet existing limit orders, so for price to be moving upwards while the delta is falling, buyers having to be moving their limit orders up, and sellers are then selling into them. There are more people actively selling as the price rises, rather than buyers hitting into the offers. So we might be in the mindset of fading this move upwards, but again, we wait to have price on our side as well. Once price starts to decline, those passive buyer orders will disappear as sellers have to sell lower and lower with greater urgency. CVD will then continue falling, but sellers are driving the move.