Volume Delta – The Ultimate Order Flow Indicator

Volume Delta

Volume delta is one of the best trading indicators you can use when trading order flow. It gives you an instant snapshot of the buying and selling pressure in a market.

After reading this post you will understand how volume delta provides a critical edge by allowing you to spot potential large reversals in the market. You will also learn how to use the cumulative delta indicator to manage your trading positions.

What is Volume Delta?

Volume Delta is the difference between buying and selling power. Volume Delta is calculated by taking the difference of the volume that traded at the offer price and the volume that traded at the bid price.

If delta is greater than 0 you have more buying than selling pressure. If delta is less than 0, you have more selling than buying pressure.

We use delta to understand the relationship between buying or selling pressure and price.

Let’s imagine a price bar that reached the low for the day and delta was negative but the bar closed higher than it opened.

In simple terms we can describe this as:

  • Price made a new low
  • The bar closed higher
  • Delta demonstrated more selling than buying pressure

Without looking at the chart below, would you be more inclined to do, go Long or Short?

Volume Delta Order Flow

If you said long you were correct. More on this later…

Volume delta is a key metric to understand when making trading decisions based on volume and order flow. However, on its own it can be too much information to interpret quickly when trading in a volatile market.

As a trader, I like to view things visually at a glance… Introducing Cumulative Volume Delta.

Cumulative Volume Delta

Cumulative Volume Delta Indicator

Cumulative volume delta takes the delta values for every bar and successively adds them together to visually provide a graph as seen above.

While volume delta is great for comparing delta bar to bar, cumulative volume delta is useful when determining buying or selling pressure at different price levels such as swing highs or lows.

Let’s do a quick recap on swing highs and swing lows.

Swing Highs and Swing Lows

A swing high (SH) forms when the high reached on a security is higher than price action around it. Once price moves above a prior swing high and begins to retrace a new swing high is formed.

A swing low (SL) forms when the low reached on a security is lower than price action around it. Once price moves below a prior swing low and begins to retrace a new swing low is formed.

When price is making higher highs followed by higher lows a market is considered to be in an uptrend.

When price is making lower lows followed by lower highs a market is considered to be in a downtrend.

When evaluating delta it’s extremely beneficial to compare delta values at swing lows or swing highs to determine the amount of selling or buying pressure and how the market is reacting.

The true power delta is revealed when we use it to determine the market’s reaction to powerful buying or selling. We want to see if the market has reacted as we would expect or not.

Swing Highs and Lows with Delta Confirmation

In the above example you will notice every time price breaks a swing low, delta does as well.

This makes sense as it takes selling pressure to break a swing low or buying pressure to break a swing high.

BUT….what’s occurring when this isn’t the case and we have divergence between price and delta?

Trading Exhaustion with Delta

Exhaustion: When less buyers are willing to buy at new highs or when less sellers are willing to sell at new lows, represented by delta.

Exhaustion Setup Short

On the above chart notice how price breaks out to new highs but Delta doesn’t follow through.

When this occurs the buyers are said to be “Exhausted” as they aren’t interested in buying at the new highs.

Trading Exhaustion Short

You can see above how the exhausted buyers began to liquidate their positions driving price down.

Let’s take a look at another exhaustion setup.

Exhaustion Setup Long

In this example price is now making new lows but delta wasn’t able to. The sellers are now said to be “Exhausted” as they aren’t interested in selling at these new lows.

Trading Exhaustion Long

The end result was the exhausted sellers began liquidating their positions driving price up.

Trading Absorption with Delta

Absorption: When aggressive buyers are unable to take price to new highs or when aggressive sellers are unable to take price to new lows. The aggressive buying or selling pressure is being “Absorbed”.

Absorption Setup Long

In the above example delta is making new lows but price isn’t following through. Even though there’s aggressive selling pressure, that pressure is being “Absorbed” by the buyers.

Trading Absorption Long

Resulting in a rally as seen above.

Absorption Setup Short

In the next example, delta is making new highs but price doesn’t follow through. Can you guess what’s occurring here?

Trading Absorption Short

The buying pressure was “Absorbed” by the sellers resulting in a sell off.

Cumulative Delta & Trade Management

Delta not only will help you spot major reversals, but it can be used to help manage your open trades as well. When in a position, whether long or short, you want to see high correlation between delta and price.

If you’re long while price is breaking new highs you want to see delta breaking highs as well. If buyer’s aren’t interested in buying at the new highs, represented by delta not breaking highs, the probability of a reversal increases.

If you’re short while price is breaking new lows you want to see delta breaking lows as well. If sellers aren’t interested in selling at the new lows, represented by delta not breaking lows, the probability of a reversal increases.

When in a position always be on the look out for exhaustion and absorption signaling a potential of a reversal.

Cumulative Delta Indicators

NOTE: I’m giving away my chart templates for Sierra Charts and MotiveWave to all JT Insiders. It’s free… SIGN UP

Sierra Charts: Sierra charts has been a rock solid platform for me for nearly 10 years. It still has it’s old and rugged user interface but it just works. Very lightweight system that doesn’t lock up even in high stress data times.

Ninja Trader: Ninja Trader offers a number of order flow indicators including cumulative delta with their free platform. If you’re looking to trade with footprint charts as well you will have to purchase their platform as the free addition doesn’t include footprints.

MT4: You will find some free cumulative delta indicators out there for metatrader but if you’re using them to trade Forex they won’t be accurate. Forex has no centralized exchange so it’s impossible to get accurate order data for volume delta. Your only option if you want to continue to trade currencies would be to switch over to futures.

ThinkorSwim: Doesn’t come standard with cumulative volume delta, but there’s some scripts out there that you can purchase and try.

Conclusion

Cumulative volume delta is one of the best indicators you can include in your arsenal as an order flow trader. It gives you an inside look at buying and selling pressure and how the market is reacting to it.

Try delta with your current strategy or with a few other components and you won’t be disappointed. If you’re interested in delta and order flow trading you definitely should look into footprint charts.

Like any trading indicator or tool it will take screen time to be comfortable with volume delta. So get out there and get testing!

What order flow tools or indicators do you like to trade with?

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24 Comments

    1. Thanks Bryan! I appreciate that. Let me know if anything is not that clear…comments always help me improve my posts!

  1. Thanks Adam, never looked at Cumulative Delta didn’t know how to use it thank you for the free lesson. sorry all I can afford are the the free lessons. I sim trade with sierra charts I have numbers bars I will use this, I am a long way from trading live.

    1. Thanks for the comment Shawn! Of course, I’m here to help. You’re going about the process in the right order. SIM trade a ton, screen time is vital to becoming a successful trader. Don’t ever go live if you’re trading with money you can’t afford to lose. The added pressure will greatly decrease your odds of success in this business.

        1. Hey Justin, thanks for the comment. I have it set for regular and after hours, so a 24 hour session. For my trading strategy I don’t look at the value, I look at the change in value relative to price. If cumulative delta is at -9,000 or +10,000 it doesn’t matter to me.

          1. Thanks for your response.

            Since it’s cumalative, wouldn’t it become less responsive by the last hour of trading…meaning that new volume is only going to have a slight effect on 23 hours of already accumulated delta?

          2. You’re correct in that it’s cumulative but less responsive no. I’m looking for divergence (absorption & exhaustion) when I use cumulative delta so the overall value of delta really has no value to me.

      1. Hey Adam, I recently subscribed. I have done a ton of research on the internet and read numerous books but I have to admit that you do an amazing job here and the information you share is priceless. I am sim trading as well for currencies but I’m thinking of switching to futures. I am grateful and thankful to have joined.😀

  2. Thanks Adam, as always you are providing a great content for free. This is one of the rare websites which provide such a quality stuff. Keep up with good work. I hope I will be one day a member of your PRO class.

  3. Hey Adam,

    great post. Is there a way to combine your delta chartbook with the footprint chartbook, so they both appear on the same chart?

    Can’t figure this out…

    Thanks

    1. Normunds simple answer is yes but it depends on what platform you’re on. On Sierra Charts it’s Cumulative Delta Bars – Volume study. On Motive Wave it’s just called cumulative delta. These are the only two platforms I use so I wouldn’t be able to help you on any other platforms.

    1. Edmund,

      Great question! I guess my question to you would be why do you want to trade a CFD? I never have but I know you’re going to have less liquidity and they are under regulated. Always just seemed like additional risk for no reason to me. If you want to trade CFD’s because of extra leverage it’s not a good idea.

      I really don’t know how CFD volume/data is even reported to a platform. You would have to ask your broker. If you have a reason you will only trade CFD’s then I would probably just look at the parent instrument it’s tracking and use cumulative delta on that.

    1. Hi Mark, thanks for the comment. Volume delta will work on equities but I’m not sure about TOS. TOS doesn’t offer volume delta unless you’re using something created by a third party. Ultimately I tell traders that want to trade order flow to get onto a platform that has all the bells and whistles like MotiveWave or Sierra Charts. Doesn’t mean you still can’t trade with TOS but you would be watching your charts from a separate feed. As of right now, most brokerage’s proprietary charting platforms are subpar if you’re trying to get into order flow.

  4. Hi Adam,

    Awesome content ! You have explained about Delta in simple yet detailed manner. Also i looked into your guide on footprint charts, another great content. I have watched YouTube videos in the past on footprint charts but none gave me a direction on trading with them. I would like to know more about trading using footprint charts and order flow trading. I tried to subscribe to your webinars but not working , if you have past webinars or videos on foot print trading, i would like to watch them.

    Thank you.

    1. Thanks Ajith! I will be posting some new videos in the near future. If you’re an insider you will receive an email when they’re published.

  5. Hello! Love you post! Very educational. I trade small cap stocks and would love to use CD, do you think I can use Sierra charts in order to be able to use the CD?

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