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My Favorite Orderflow Indicator: Beginners Guide to CVD — Transcript

by Andrea Cimi · 2,681 words · 382 segments · language en · Watch on YouTube

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0:00The world of order flow and volume
0:01analysis is one of the best places for a
0:03day trader to find an edge because it
0:05provides a clear understanding of who is
0:07in control in the market, who is really
0:09moving it, who is blocking it and how.
0:11Volume not only makes you understand
0:13participation or how much institutional
0:15interest there is in a certain movement,
0:17but also is the effort in one movement
0:20being satisfied or being absorbed. And
0:23all these crucial data points can give
0:25you anformational edge that price action
0:27simply can't provide. And one of my
0:29absolute favorite orderflow tools is the
0:31cumulative volume delta or CVD, which is
0:33technically an indicator, but it's not a
0:35stochastic oscillator or a moving
0:37average. It's pure raw orderflow data.
0:40The cumulative volume delta gives you a
0:41raw indication of market pressure and
0:44slight divergences in market pressure
0:46can often anticipate price reversals.
0:49But writing this video, I checked some
0:50videos on YouTube about CVD and I've
0:52seen so many misconception about the use
0:55of this tool. So today, not only I will
0:57delve deep into what CVD actually is,
0:59and how you can use it to boost your
1:01edge, but also how not to use it, where
1:03it can give false signals, and most of
1:05all, how to give it a context with my
1:07top one favorite orderflow tool, which
1:10is orderflow candles or footprints. This
1:12video is only one of a series of videos
1:14that I'm making about orderflow. I'll
1:15leave you the playlist up here or in the
1:17description down below if you want to
1:18check it out. And if you know zero about
1:20orderflow, you might want to check out
1:21that one first cuz to see this video,
1:22you kind of have to understand some
1:24basics. So let's take as an example a
1:26normal footprint candle. As you know in
1:28this part of the candle we have all the
1:31aggressive selling that sold to the
1:34passive buyers of the book. In this part
1:36of the candle we have all the aggressive
1:39buyers that have bought the contracts
1:41that were sold in the ask by passive
1:44sellers. So again this is traded in the
1:47bid and this is traded in the ask side
1:50of the market. The formula of delta is
1:53nothing more than the difference between
1:56ask traded minus bid traded. So if the
1:59total volume traded in the ask is six is
2:025 + 1 + 2 + 3 which is 11. The volume
2:05traded on the bid is 15. So the total
2:07volume traded in the candle would be 26
2:10and the delta would be minus4. So the
2:12delta is showing us that aggressive
2:16sellers in this side of the candle were
2:18more present than aggressive buyers in
2:22this side of the candle by a total value
2:24of minus4 contracts. Or if you use the
2:27delta percentage which is total delta
2:30divided by total volume* 100 the delta
2:32percentage would sit around at 15%. So a
2:3615%
2:37majority of sell aggression to buy
2:40aggression. So in this candle overall
2:43there was more seller which were ready
2:45to accept lower and lower prices to get
2:48filled than buyers were. So let's say
2:50this is actually a bearish candle. A
2:52bearish candle with this delta shows us
2:55that actually in all of this candle
2:57sellers are driving the auction lower
3:00and lower. Let's look at an actual
3:02example. Let's go to our orderflow
3:03chart. And as you can see these candles
3:06are pure candles. So we're going to add
3:07some indicators. And if we zoom in, we
3:10see that we have actual order flow.
3:11Let's make it a little bigger for you
3:13guys to read. So this is footprint
3:15candles or orderflow candles. Another
3:17thing we can add is orderflow values.
3:19And as you can see, this shows us
3:21exactly those values that I told you
3:23about. The total volume of each candle,
3:26the total delta volume of each candle,
3:28and the total delta percentage of each
3:30candle. So if we zoom out completely. So
3:33as you can see in a in an initiative
3:35candle you usually have 26% delta
3:37because you have a lot of buying
3:39pressure inside of that candle. Even in
3:41this candle which which started as a
3:44very prominently sell candle actually
3:46closed with a very strong rejection.
3:49Still buyers here were not as present as
3:51sellers. There was way more selling
3:53pressure on this candle. And there might
3:54be situations where even a bullish
3:56candle might have a low delta which
3:58makes us understand that something is
4:00starting to change in the auction and we
4:03might soon reverse as we actually did.
4:05So this is the first idea of divergence.
4:08Look at the sell candle as an example.
4:10If you look at this sell candle, it has
4:12actually buying delta but it's overall
4:14not really unbalanced because we have
4:16only 4% delta. It's not a lot. Real
4:18initiative candles like this one instead
4:20has at least 10% delta. That's my way of
4:23assessing if a candle is the beginning
4:25of a real new initiative. In fact, after
4:27this very initiative candle, we go lower
4:29and lower. But here, even though there
4:31was a high delta of buyers, we we can
4:34see that most buyers were actually
4:36absorbed on this level. So, the true
4:38selling pressure was here where sellers
4:41were blocking the rise of buyers. Then
4:43the buyers did some momentum ignition
4:46before giving up again. So, we always
4:47have to contextualize what's happening
4:49in the footprint. where is the actual
4:51absorption is happening. So even though
4:54there is a high delta, sellers are still
4:56in control in this candle. That's why as
4:58you will see later on this video, we
5:00need to contextualize delta with what's
5:02happening inside a candle. Now this is
5:04the delta for every singular candle. But
5:06what if we could take this delta and
5:08have it in a chart that makes it more
5:10easy to understand and more easy to
5:12identify divergences without looking at
5:15the actual numbers? We can do it with an
5:16indicator called cumulative volume
5:18delta.
5:21which is the cumulative version of the
5:23delta we just learned. We will take the
5:24candlesticks because they're much easier
5:26to look at. Here it is. This is the
5:27cumulative volume delta. And as you can
5:29see, even without looking at the
5:31candles, we can see that this candle was
5:34very prominently sell pressure, but also
5:36a lot of buy pressure. Like this candle
5:38in 1 minute didn't really go anywhere.
5:40It moved like eight ticks. It was just a
5:42low liquidity spike. Still, it has a low
5:44delta. And as sellers move price lower
5:47and lower, we see this selling pressure
5:50is still going on. But the low of this
5:52candle and the low of this candle
5:54comparing them here are actually very
5:56divergent like this.
6:00This can mean there was not a lot of
6:02participation in this movement or that
6:04there was a lot of sell participation in
6:06this movement that was so there was a
6:08lot of effort from seller to go down as
6:10we can see from the delta but buyers
6:12were resisting in the book and absorbing
6:15all of this. So this type of divergence
6:18where price can't break but delta
6:21breaks. So we have this situation or
6:23here price can't break
6:27but delta breaks.
6:30So we have this divergence
6:33is called an absorption divergence. And
6:36as we keep going in the next part of the
6:38chart as you can see this low which is
6:41this low and this low which is this low
6:44are pretty [ __ ] divergent. Why is
6:46that so? Why if price is rising the
6:48pressure is actually sellers? Well, my
6:50friends, this happens because sellers
6:52were the one who were trying to push
6:55down price. So, they were the one who
6:58were actually making an effort in all of
7:01this area by pushing price down and
7:04hitting all the contracts in the bid
7:06side of the market. But all of their
7:07effort was not enough to push price
7:09lower, which means they have been
7:11absorbed by buyers. This is another
7:13divergence. And when a real good
7:16initiative candle can be this one or can
7:19be this one start happening into the
7:22market that's the first buy signal that
7:24buyers are not only in control of seller
7:27aggression but they are starting to be
7:29the ones who are actually pushing price
7:31higher. So this is what happens when
7:33delta and price are converging. Let's
7:36see another example here from the
7:37previous session. We can see that this
7:39low has been plotted then a new low is
7:42being plotted. So this and this, we're
7:44still convergent. But what happens here
7:45is really interesting because we in this
7:47move are pushing price lower until we
7:50reach exactly the same level of this low
7:53over here. So these lows are equal, but
7:55these lows have a different divergence.
7:57This selling pressure and selling
7:59participation and this buyer
8:01participation are way higher than
8:03sellers participation in this part of
8:06the movement. Sellers are not really
8:08trying a lot here. So without a lot of
8:10effort they're able to push price lower
8:12which means that there is a lower level
8:14of participation in this movement both
8:16from buyers and from sellers. This is a
8:18signal of exhaustion in market selling
8:21selling pressure and another signal for
8:23reversals. So when price goes low even
8:26breaks the previous low but the CVD
8:29doesn't it means that in this impulse
8:32there is less participation less
8:34interest and in general a lack of
8:36participation. So this is our
8:38divergence. Same if the price is getting
8:41higher but the delta isn't. This is a
8:44sign of lack of participation in the
8:46last bullish movement which indicates an
8:49exhaustion in buyers. So to summarize in
8:51an absorption phase price will not be
8:54able to push. So we will not have higher
8:57highs but CVD will keep making higher
9:00highs because there's a lot of effort. A
9:02good example of this is
9:06icebergs. We talked about icebergs in
9:08the previous video and usually an
9:09iceberg will have this sort of price
9:11action where price action every time
9:14they get here on this level all the
9:16buying pressure is being absorbed. This
9:18is price. The CVD of an iceberg will
9:21look something like this. something like
9:23this where buying pressure keeps getting
9:26higher and higher but all that pressure
9:28is being absorbed on this level.
9:32Okay.
9:33So this is a clear signal that there is
9:35an iceberg order like it's an extra
9:37confirmation. A lack of participation
9:39instead is a moment where price actually
9:42breaks but in that breakout there is no
9:44interest there is no pressure. So the
9:46CVD goes something like this.
9:48Participation gets lower. Another
9:50examples and this can mean an exhaustion
9:52in sellers and this mean an ex and this
9:55can mean an exhaustion in buying
9:56pressure but a very common a very common
9:59exhaustion example which is the stop run
10:01or the failed auction normally a failed
10:03auction will look something like this
10:05but a stop run where let's say price is
10:08doing something like this so we have a
10:10lot of buying pressure here normally
10:13even though it's an exhaustion type of
10:15pattern exactly like a lack of
10:16participation the delta will also be
10:19something like this. Okay. So, we will
10:21see a lot of participation and
10:23absorption at the same time that will
10:25push the CVD higher because there is a
10:27lot of actual buying pressure. And
10:29always remember CVD always means
10:31aggression and absorption at the same
10:33time because if there is a lot of buying
10:37on this level, the delta will go higher.
10:39So yes, there is a lot of aggression but
10:41this aggression can also be completely
10:43absorbed. So yes, there is a lot of
10:45absorption but there's also a lot of
10:47aggression. So there's always this two
10:49sides of the coin. That's why we always
10:51have to give it a context with price
10:54action and look at where there can be a
10:56divergence. But an important thing to
10:58remember is that these things work only
11:00for very short-term divergences like the
11:03one we saw where we go into the detail
11:05in the one minute chart and look at
11:06divergences. But trying to look at
11:08bigger size divergences like taking five
11:12or six swings in the market can be
11:14sometimes a little deceptive. So I'm
11:16kind of laughing where I see a whole
11:18session going down, going down, going
11:21down, but the delta is keep going up. So
11:24it's a huge divergence. So you know the
11:27market has to [ __ ] run back up.
11:29That's not how it works. You should
11:30always look for diverency in the smaller
11:33parts of price action, not throughout
11:35the whole session because throughout the
11:36whole session, a divergence in delta is
11:39not necessarily indicative of an anomaly
11:41in market pressure. But it might just
11:43mean that institutional activity was
11:45more present in the passive side of the
11:48book rather than in the aggressive side
11:50of the book. So due to this
11:52institutional algorithmic activity, you
11:54might have this session where the just
11:56delta keeps going up while the price is
11:58clearly bearish. But but if you zoom in
12:00and if you look at actual divergences in
12:03a lower time window, that's where you
12:06get an actual advantage from these. This
12:08is a clear lack of participation in this
12:10movement which means an exhaustion in
12:11seller selling pressure and in fact we
12:13run back up. I personally use this
12:16cumulative volume delta for short-term
12:18divergences at the beginning of the
12:19session. So for example, I will put
12:21myself at the beginning of a session and
12:23look for divergences. In this session
12:25particularly, we didn't really have any
12:28divergences in the upper part. We only
12:30have a divergence with this two candles
12:33as you can see. Nothing really crazy.
12:34But probably here, as you can already
12:37see, the point of control of this candle
12:38is right here. The delta is long. And I
12:40see already a very very green slot here,
12:45which means that there's there's
12:46probably going to be a huge absorption
12:48of buying pressure by passive sellers.
12:52And as we can see, there is there was an
12:54iceberg order here that absorbed this
12:56attempt of buyers to push price back
12:58higher, which completely failed. So this
13:00means full selling pressure for me both
13:03on the aggression side and on the
13:05passive side. So even though this is a
13:07diverging candle, this is telling me the
13:08exact same information as a completely
13:11short candle with full aggression and
13:14full delta. For me, this is not meaning
13:15that we're going to bounce back up. This
13:17for me means that we're going to
13:19continue going back lower. That's why I
13:21always give it a context. And as you can
13:22see, this was the beginning of a whole
13:24short session. So we go short for the
13:26whole session. Let's see what happens at
13:27the end of this session. As you can see
13:29here, the two swings were vastly
13:32divergent. If we go inside here, we
13:34already saw here we had a lot of buy
13:37buying pressure, but price kept going
13:39lower. Here we had a convergence in
13:41price and delta. But once we start
13:43running back up a little bit, we have a
13:45new divergence here with seller being
13:48absorbed in this part of price action.
13:50And when the next candle comes up, this
13:53is the initiative candle. This can be an
13:55entry signal. So this is how I use
13:57cumulative volume delta. Try to
13:59implement it also in your strategies in
14:01specific areas at specific times in your
14:05price action patterns and see how it
14:07works. And if you have any feedback on
14:08this tool, if you've back tested it, if
14:10you've used it, leave a comment. If you
14:11like this video, leave a like and a
14:13follow. And I'll see you in the next
14:14one. Chop.

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