The markets and their price moves are always in tension between the strength of buyers and sellers. One of the clearest pictures of the battle between buyers and sellers can be seen in the Cumulative Volume Delta indicator. Using it is like seeing the bullish and bearish soldiers on the battlefield and understanding the strength behind each price move.
Let’s take a closer look at how Cumulative Volume works and how to use it in trading.
Why Cumulative Volume Delta (CVD)?
Unlike many indicators, Cumulative Volume Delta is not a price-derived indicator. This gives it two distinct advantages: 1. It will give information to traders that price by itself will not, and 2. It is not a lagging indicator. I would argue that CVD is one of the few leading indicators available to traders.
What’s a lagging indicator? This is an indicator which measure outcomes of events from past time periods. For example, a 20-day EMA uses the prices from the last twenty days. A lagging indicator often shows changes in price behaviour long after the changes occur; in other words, a lagging indicator is constantly catching up.
In contrast, Cumulative Volume Delta measures buying and selling volume in the current candle. This calculation is independent of the price move and is performed in real time, both of which make CVD highly predictive.
What does Cumulative Volume Delta measure?
In almost all markets—futures, equities, Forex, etc.—there are two prices at any given time: the bid and the ask. When I buy, I pay the bid (the higher price), and when I sell, I receive the ask (the lower price). Therefore, during an active market, buyers are hitting the bid, and sellers are hitting the ask.
At any moment, there is often an imbalance between the market order volumes hitting the bid and those hitting the ask. (This imbalance, along with the number of limit orders sitting at the bid and ask, is ultimately what moves the price.)
Cumulative Volume Delta plots the difference between the volume of market orders that hit the bid versus hitting the ask. This net difference is then added or subtracted from the previous period to give a running total. Therefore, its formula is:
CVD = Σ (Buy Volume – Sell Volume)
Because CVD is a running total, it must start at a zero level at some point. This is known as the “anchor period.” The settings for the CVD indicator on a trading platform typically allow users to customize the anchor period. For example, a common CVD anchor period for a 15-minute chart is 1 week, meaning that CVD resets to zero each week for that chart.
What’s CVD Telling Us?
Cumulative Volume Delta visualizes a running total of the difference between buying and selling volumes for each period. This represents the balance of power, or the net buying and selling pressure over time. CVD helps determine whether volume is driving price moves and whether those moves are sustainable.
- When CVD is positive, there is more buying volume than selling volume in that period
- When CVD is negative, there is more selling volume than buying volume.
- If CVD trends upward, net buying volume increases, indicating greater buying control
- If the CVD line trends downwards, net selling volume is increasing, indicating more selling control.
How Do I Trade Using Cumulative Volume Delta?
Confirming a Trend
This is the easiest way to use CVD. If the price is trending, the CVD line should be trending in the same direction.
In this case, the Cumulative Volume Delta shows that the upward price move is accompanied by rising buying volume, as we would expect for a sustainable move.
CVD Divergence
Here is where CVD can tell us something that price alone cannot. When CVD diverges with price, it means price says one thing, but CVD suggests another.
If price makes a new high or low, but CVD does not, treat that as an early warning sign. It means the underlying buying or selling pressure may not have the substance that the price move suggests. Let’s look at some examples.
Here, the price makes higher highs during a pullback from a previous downtrend, but the CVD is suspiciously flat. This divergence predicts a price stall followed by a sharp drop. I find CVD divergence particularly helpful for confirming that a price move is a pullback within a larger trend.
Let’s see some more examples.
In the above example, on the S&P 500, we see the price push past a previous high, but the Cumulative Volume Delta is nowhere near what it was during the previous high, i.e., it’s diverged. Notice how the price subsequently stalls.
Above, after the price and CVD made higher highs, the price stalled and made a resistance level, and the CVD immediately diverged. The price subsequently moved down.
Absorption Candles
Absorption candles occur when there are large CVD candles, but the price hardly moves, i.e., the candles are “absorbing volume.” Absorption candles often point to a large move about to take place. Let’s take a look:
Suddenly, the CVD candle sizes explode, but the price moves are suspiciously small during this. Then, a big red candle prints and continues the previous trend.
Trap candles
This is when a CVD candle spikes in one direction along with price, but the price reverses in the next candle. It points to a “trap move” or reversal.
Suddenly, the CVD candle sizes explode, but the price moves are suspiciously small during this. Then, a big red candle prints and continues the previous trend.
Some traders also plot the “Volume Delta,” which is like CVD, but plotted as a regular histogram. It makes it much easier to see spikes in Volume Delta. However, Volume Delta won’t show divergence, so I would use it only in addition to CVD, not as a replacement.
Use Cumulative Volume Delta as a Context Tool
Every indicator, tool, and chart pattern should be used in the context of market conditions. What does that mean? It means do not blindly follow an indicator in isolation from the market. Here are some key things I consider:
Support and Resistance
Am I buying in line with support and resistance? Or am I trading against key levels?
Trend
Am I taking positions against a trend? I would generally much rather take a position in line with a trend.
Higher timeframe
My analysis incorporates the higher-timeframe trend, along with support and resistance levels.
News
I do not want to enter a trade before a major news announcement that could affect my position. Always check the economic calendar.
Here’s an example of using a Cumulative Volume Delta while considering the market context.
A clear CVD trap setup appeared on the BTCUSD chart, with a spike in CVD followed by a clear price reversal. This is a clear bearish signal, but it becomes a viable signal because of numerous additional factors:
- The price reversal also formed a bearish engulfing setup with the second candle’s body engulfing the range of the first candle’s body in the opposite direction. This is one of my favourite candlestick reversal signals.
- Prior to the CVD trap setup, there was a bearish “pin bar.” After that, the price made lower highs. The CVD trap setup itself formed a lower high, giving another bearish confirmation.
- Zooming out to the weekly chart, the price tests a previous support level as resistance and completes a bearish weekly engulfing setup.
Platforms for Cumulative Volume Delta
CVD is highly sensitive to the quality of data from the platform, especially at lower timeframes.
TradingView’s Version of CVD
TradingView has a built-in Cumulative Volume Delta tool. However, it does not have exchange-level bid and ask data. Instead, it uses aggregate data from brokers, which provides a generalized view but not the exact CVD footprint. I would use TradingView’s CVD for bias, but not for execution. I would prefer to use a non-browser platform that has real-time exchange-level data for an accurate CVD picture. Real-time exchange data is never free and would incur a subscription cost.
Forex and OTC markets
Spot Forex is an Over-The-Counter market, meaning there is no centralized exchange. That makes it much more challenging to use CVD accurately, as the volume data can vary across brokers. I recommend using CVD only with the largest brokers, or, better yet, using CVD with currency futures rather than Spot Forex.
Bottom Line
Cumulative Volume Delta (CVD) shows the running total of the net difference between the volume of market orders hitting the bid versus the ask. CVD displays the buying or selling pressure behind a price move. A positive or upward CVD bar means more volume hit the bid compared to the ask in that period, and a downward CVD bar means less volume hit the bid compared to the ask in that period.
CVD displays the buying or selling pressure behind a price move.
CVD can be used to confirm a trend, i.e., when it’s moving in the same direction as the price. I find it is more powerful when it diverges from a trend, because it can tell me something that the price alone cannot.
Additionally, absorption candles (a large CVD bar with a small price move) or trap candles (a large CVD bar followed by a price reversal) provide information to a trader that cannot easily be seen from the price alone.
Always use CVD in context with the market conditions. Factor in the overall trend, any other candlestick setups, support and resistance, and the higher timeframe.
