To the untrained eyes, candlestick formations can be haphazard. However, a level deeper there is a unique story at each point of time. Depending on a trader’s preferred trading style, time frame, tools and even indicators, a technical chart is vital for a chartist. Since the chart is a complete representation of all fundamental and/or technical events of any tradable asset, learning the ebbs and flow of price action and related patterns is not enough. There ought to be more.
Over time, traders have noticed that volume is a very valuable tool which offer excellent insights and therefore indispensable. Price action in its pure form is mostly aligned by demand and supply dynamics. The more of the former, the higher the price, and vice versa. At any point in time, the price of any asset-whether it be Bitcoin, XRP or any periphery coin, is at equilibrium. A price that the market has unanimously agreed to be fair.
A shrewd trader should consider using a volume-based indicator. Not only is it real time, it could paint a story that can shape a trader’s trading strategy. There are many volume-based indicators availed. Regardless of experience, a thorough understanding of these volumes-based indicators is necessary.
What is the Cumulative Volume Delta (CVD) indicator?
In this section, we will break down the Cumulative Volume Delta (CVD) indicator.
The indicator can be found on Coinalyze charts on “Indicators” window/popup. It is a proprietary indicator developed by the Coinalyze team and cannot be found even at TradingView.
Once loaded, the indicator looks as below:
In order to understand what this indicator does, first understand what a “delta” is.
Simply put, a delta is the difference between buy and sell volumes within a period/candle: 1-Day, 1-Hour, 2-Hours, 15-Minutes etc. On the chart above, the green bars represent buy volume while the red bars represent sell volume.
The delta can be positive (buy volume is greater than sell volume), negative (buy volume is less than sell volume), or zero (buy volume is equal to sell volume).
The Cumulative Volume Delta (CVD) indicator is based on these deltas. It starts from a user specified origin bar and successively cumulate the deltas. The cool thing about CVD is that you are at liberty to specify the origin/start bar, and hence the accumulation period of your choice. Here is how the CVD is calculated:
For example, if you specify 10 as the origin bar, then:
CVD on bar 10 = delta on bar 10
CVD on bar 9 = delta on bar 10 + delta on bar 9
CVD on bar 8 = delta on bar 10 + delta on bar 9 + delta on bar 8
… and so on
NB: Bar X means X bars ago
If you like the CVD to start from the first bar then specify “0” as origin bar.
Here’s an example of a CVD, on a LTCUSD chart, with the origin/start bar specified as “60”:
For a trader, this is a pure gem. If the CVD line is negative sloping that means more sellers are in action as the demand of the asset wanes. This is usually a sell signal and a trader should search for selling signals.
Conversely, if the CVD line is positive sloping, it means that there is more demand for the asset.
Why the Cumulative Volume Delta (CVD) indicator is Important
CVD, as it is, summarizes the activity of market participants. The highlighting the relationship between buyers and sellers, in a sphere that is mired by market manipulation, traders have an edge. However, note this: the indicator is well-suited for day traders. It will be counter-intuitive to use this indicator in higher time frames.
Often, the number of sell and buy orders in higher time frames are balanced, and using CVD in those time frames could offer no actionable value for traders. For the best result, we recommend it that CVD be activated in 5-30 minutes chart.
Interpreting the Cumulative Volume Delta (CVD) Indicator
Litecoin (LTC) is bullish against the USD, printing higher in the last few days. Reflecting buyer and seller activities and general sentiment, the CVD indicator is positive sloping. Behind this increasing strength, note that buyers are stronger than sellers as relayed by the Buy Vs Sell volume bars. With an increasing demand of LTC, there is an opportunity for a trader to buy the pull back.
Combining with Other Indicators
To better do this, the best approach is to combine the CVD with other indicators before making an informed decision. You can use the CVD with Stochastic indicators for example. But the choice is really on you. There are thousands of indicators you can chose from.
From the chart, indicators suggest that LTC is recovering against the USD. Therefore, the best course of action is to trade with the trend. That means a trader should only buy when there is a buy signal printed from deep in the oversold territory as directed by the stochastic indicator. At the same time, the CVD plot line should be positively sloping.
From this, other confirmatory indicators can help absorb the noise. However, understanding how the indicator works is paramount.
In a rising market, the CVD will grow and the line will slope positively. On the reverse side, dropping CVD means sellers are in charge and a negatively sloping line will mark that.
When it is flat, the market could be in accumulation or distribution, and neither buyers nor sellers are in control. When this happens, it is best to stay out of the market until either the CVD grows or falls.
To cap this, a trader should take his or her time to first understand that the CVD is just like any other indicator. It is not perfect, but could help improve the frequency of posting winning trades. There will be losses, true, but if there are more winners than losers, then it’s a success for the trader. The gist here is to be patience, create a working trade plan, and use this indicator to filter out excess market noise.
Disclaimer: This article is not investment advice. Note that cryptocurrencies are highly volatile assets and very risky investments. Do your research or consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.