Order Flow Charts
Cumulative Volume Delta (CVD)
In order to understand the Cumulative Volume Delta (CVD) we first need to understand Delta.
Delta is the different between the buy and sell volume within a specific candle. The delta can be positive, negative or equal to zero.
A positive delta means that the buy volume was greater than the sell volume while a negative delta means that the sell volume was greater than the buy volume. A zero delta means that the buy and sell volume were equal to each other.
The Cumulative Volume Delta displays the cumulative sum of these deltas starting from a point of origin usually the open of the day week or month to the current moment.
Since the CVD is the cumulative sum of the delta it usually mirrors price. This means that when there is a break in the correlation between price and the CVD it can be a sign of either exhaustion or absorption.
For example, when price makes a lower low while the CVD does not. This shows seller exhaustion as price kept falling without new sellers fueling the trend.
Another example is when the CVD makes a lower low and price does not. This shows seller absorption as aggressive sellers kept hitting the bid but got absorbed by passive buyers.
Both of these scenarios can lead to a reversal in price. The same also applies when comparing highs.
Order Flow Meter
While the delta shows us the difference between aggressive buyers and aggressive sellers, our orderflow indicator measures the strength of buying or selling depending on which side is bigger.
As the difference gets larger, the OF indicator gets more extreme and as the difference gets smaller the indicator gets closer to zero.
This tool can be used by traders to identify when there is an extreme in aggressive selling or aggressive buying which often ends up being turning points in the market.
When we see an extreme in aggressive buying at a high or aggressive selling at a low those aggressive market participants are likely to end up getting trapped as the market turns around.
The same way when we see an extreme in aggressive buying at a low or aggressive selling at a high it might be the sign that a new trend is about to begin.