What is Cumulative Delta (CVD Indicator)?
Cumulative Volume Delta (CVD) is a way of using Delta to measure an asset’s mid- to long-term buy and sell pressure. It compares buying and selling volume over time and offers insights into market behavior at specific price points.
What Is Delta In Crypto Trading?
To understand what Cumulative Delta is, it is first necessary to get to grips with ‘regular’ Delta. In its traditional form in derivatives trading, Delta is the difference in trajectory between an option’s price and the price of its underlying asset.
In crypto trading, Delta commonly appears as a volume tool, measuring the difference between buy and sell pressure at a specific price point. For example, a candle chart will display buy and sell volume for each candle, be that a one-minute chart or a one-month chart. Each candle, however, contains an amount of that asset that was bought and an amount that was sold. Delta measures the relationship between the two for each candle.
Fluctuating around zero, Delta will be positive if there is more buying pressure than selling pressure and negative if selling pressure is greater.
TabTrader has a dedicated guide to Volume Delta for users to read before trying out the dedicated Volume Delta indicator released late last year.
What Is The Cumulative Delta Indicator?
Cumulative Delta is effectively a continuation of the principles of Volume Delta but involving longer time periods and offering different trading signals.
Like the Volume Delta indicator, the TabTrader Cumulative Volume Delta (CVD) indicator measures the relationship between buy and sell pressure, but does not focus on one specific candle (or other chart feature) in particular.
Rather, CVD takes the relative differences in trader behavior and combines them all over an extended time period — hence the “cumulative” tag.
The result is analysis that shows how market participants behave at one price point as it reappears over time. That price point can be anywhere, but taking local highs and lows on a chart — the outlying price points known as “swing” highs and lows respectively — can indicate how the market treats attempted breakouts or breakdowns.
More significantly, however, CVD reveals buying and selling trends which may or may not complement the price trend of the asset itself. These are called CVD divergences and are a very popular tool among crypto market analysts.
Crypto CVD Divergences
Using the CVD indicator, it is possible to see demand (or lack of it) for an asset as its price exhibits longer-term trends. Sometimes, those price trends can run in contrast to trading behavior — sell volume can be dominant while spot price is rising, and vice versa.
Using that information, it is possible to gauge both market participants’ ideas of where the market is headed and time one’s own trades to take that sentiment into account.
The above scenarios are both examples of so-called CVD divergences. There are several classic CVD indicator structures which can constitute a divergence from price action. The graphic below shows four: two “absorption” scenarios and two “exhaustion” scenarios relating to buying and selling respectively.
Divergences also help inform an existing trading strategy or position. For example, being long BTC as spot price increases but CVD decreases may suggest that the underlying price trend is unsustainable and apt to reverse.
The reverse can be equally valid — declining spot price amid increasing CVD suggests that downside may end up being limited and not resort in a liquidation cascade or deeper capitulation event.
How To Use The TabTrader CVD Indicator
The TabTrader CVD Indicator is now available across the mobile and web interfaces.
CVD can be set to measure Volume Delta from the start point of choice to a given endpoint over various timeframes.
The formula the indicator uses is:
Cumulative Volume Delta (CVD) = n (sum of Delta for the period the user selected in the indicator settings) = current n-1
For example, to use CVD on a 1-hour chart, go to the indicator settings and set the Parameter value to 24. The CVD indicator will measure CVD over 23 consecutive hours plus the current hour.
Get The Most Out Of CVD
If the concepts of Delta and Cumulative Delta sound complicated, TabTrader’s Delta Indicators can still provide valuable trading insights. Here are three key ways in which beginners can use CVD to inform their strategies and improve their results.
Identifying market trends
Look at CVD data over a selected period of time. CVD will either be overall positive (implying more buying volume than selling volume) or negative (more aggregate selling volume than buying volume). Regardless of what the asset price is doing, CVD shows either a trend of increasing or decreasing volume, which has implications for market sentiment — increasingly bullish or increasingly bearish/ ambivalent.
Validating price action at specific points
Similarly to above, CVD increasing along with price serves to strengthen trajectory and give traders more confidence that further upside is due. The reverse is also true (decreasing price and decreasing CVD, ie. selling pressure becoming more and more dominant). These CVD signals are also useful when an asset price hits a swing high or low, or challenges a key price point after a long absence — CVD behavior here will show sentiment toward the asset at these rare price points.
Flagging market reversals
CVD can change quickly once a certain price point is reached. Should this happen, it is worth noting that a trend reversal may come next — a sudden decrease in CVD during an uptrend, for example, could imply buyer exhaustion and sellers beginning to distribute to the market. A long position here would carry heightened risk. Similarly, CVD can also show seller exhaustion following a downtrend or capitulation episode.
Conclusion
CVD is an increasingly popular tool for crypto analysts and traders to measure market trends and analyze sentiment at different price points through time.
The data that CVD generates provides a picture of long-term market trends and how they might play out in the future. Observers can see how the market behaves at swing highs and swing lows across long periods. CVD divergences add nuance to traders’ understanding by showing when trading behavior contrasts with price action.
It is important to note that CVD is best used in conjunction with other indicators in order to confirm a given trend — it is rarely, if ever, used as a standalone yardstick for price or trend analysis.
The TabTrader CVD indicator is a new release for TabTrader users now available across our suite of products for web, iOS and Android. Check out CVD and more as you trade over 20,000 instruments across more than 30 of the biggest crypto exchanges with the TabTrader app.
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