Reading Cumulative Delta Volume to Identify the Next Move

Reading Cumulative Delta Volume to Identify the Next Move

Cumulative Delta Volume Analysis is a leading indicator because it can identify where the next move is likely to go.

Cumulative Delta Volume Bars
Cumulative Delta Volume Bars Getty Images

The Multicharts Cumulative Delta Volume Analysis charting option plots buyers versus sellers as a candlestick formation, very similar to a candlestick price bar.  Traders can also read the volume bars the same as they read price bars.  Since it is a leading indicator it is a great compliment to trading Out-of-the-Money binary options.  Here is an example from this morning on the EURUSD.

The 15-minute chart shows the EURUSD price bars on the top, the Cumulative Delta Volume Analysis chart in the second pane, and the Directional Volume indicator in the bottom pane.  First, notice how the Cumulative Delta looks identical to the price bars, green for bullish (buyers dominated), red for bearish (sellers dominated the bar).  Ideally, both price and volume should match.  In other words, if price is making higher highs, then the Cumulative Delta should be making higher highs (more buyers entering the market as new highs are formed).  In this example, price made lower highs but the Cumulative Delta made higher highs.  This is referred to as hidden divergence and signals a strong move to the downside which looks to be likely probable.

Reading Cumulative Delta Volume barsMulticharts Cumulative Delta Volume Analysis Chart on GBPUSD

In this case, the next price bar moved down from 1.1589 to  1.1553 or 36 pips.  Since the EURUSD binary option strike width is only four pips, price moved down the equivalent of nine strike prices in one bar.  Also notice that the Directional Volume, which plots both buyers and sellers per price bar and incorporates price action, shows that on the same bar where the hidden divergence formed, sellers stepped in and took control (yellow circle shows the delta is below zero). 

Reading Cumulative Delta Volume to Identify the Next MoveMulticharts Cumulative Delta Volume Analysis Chart on EURUSD

Cumulative Delta Volume also shows when hidden buying (or selling) is occuring.  For example, notice on the chart below that as price is moving down, instead of sellers controlling the bars, buyers are in control.  With both the 30 and 60-minute charts Stochastics indicating an oversold market, this hidden buying could be traders taking profits, which will create a pullback, or it could be a change in market direction prior to the US opening.

Cumulative Delta Hidden BuyingMulticharts Cumulative Delta Volume Analysis Chart on EURUSD

To learn more about reading forex volume, join the Nadex Trading Binary Options Using Volume Analysis webinar on Wednesday, June 19th at 11am New York time.

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