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Cumulative Delta


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Cumulative Delta

 
obee2732
Victoria, British Columbia, Canada
 
Posts: 2 since Aug 2022
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Hi, I am using Sierra Chart. Today Sept 26, 2022 I was watching ESz2022 and had cumulative delta volume too. Where I am confused is that my Cumulative Delta was positive all day whereas the price action sold off from the highs all the way below the open back to prior day lows.

I would've anticipated Cumulative Delta to be negative, showing that Sellers were in control.

Does my logic make sense?
Is there something wrong with the way I have set up Sierra Charts?
or is it possible to have postive Cumulative Delta on a day of selling?

Thanks


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mrchengan
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I don't have sierra chart but anything is possible. That could mean the passive/hidden sellers were more dominant than aggressive sellers therefore the price falls faster than cumulative delta. I am not sure what time frame you use, but I find it cumulative delta in ticks time frames more useful than minutes time frame. Higher timeframe almost makes CD useless, by the time you spot something is probably already too late or inaccurate. Probably most software don't support tick level cumulative delta, that's something I discovered by myself.

 
RandomDude
Las Vegas, NV
 
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Take a look at the formula, guessing the size of the bar is not in the calculation, so if have large down bars and more small up bars, then can create the divergence you describe.

 
 
WoodyFox's Avatar
 WoodyFox 
Columbus, Ohio
 
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obee2732 View Post
Hi, I am using Sierra Chart. Today Sept 26, 2022 I was watching ESz2022 and had cumulative delta volume too. Where I am confused is that my Cumulative Delta was positive all day whereas the price action sold off from the highs all the way below the open back to prior day lows.

I would've anticipated Cumulative Delta to be negative, showing that Sellers were in control.

Does my logic make sense?
Is there something wrong with the way I have set up Sierra Charts?
or is it possible to have postive Cumulative Delta on a day of selling?

Thanks

Cumulative Delta does not have directional bias in plotted form, you must understand what its telling you in terms of who is trading and how.

Here is a good example of how to explain it...just google search it.




An example of how cumulative delta can be misleading
Let us assume that there is a market comprised of 11 participants: one very large trader and ten smaller ones. We’ll assume that this single large trader is looking to buy 1,000 contracts but does not need a fill at a single price and can afford to be a bit patient in the hope of gaining more favorable execution. The ten smaller traders are looking to sell 100 contracts, either immediately or slightly above market. Let us further assume that the instrument in question is priced at $100 and is tradeable in increments of $1.

At the opening $100/101 (bid/ask), the large buyer sits on the bid with his order. The first seller steps in and hits the bid (executes a market sell order) for 100 contracts and is filled immediately. The large buyer has gotten 100 contracts of his 1,000 lot order filled. Cumulative delta is now -100.

The next seller steps in and hits the bid getting a fill. Delta is now -200.

The next seller steps in and hits the bid getting a fill. Delta is now -300.

The following seven sellers all look at themselves and say, "There's buy-side demand for this. I'm raising my price to $102”. The offer price then shifts up to $102, and the large buyer says, "ok, I'll bid $101 now”, so we end up with a new 101/102 inside-market.

The 4th seller hits the bid at 101. Delta is now -400.

The 5th seller hits the bid. Delta is now -500.

The following five sellers say to themselves, "Hold on now, there's some real buying demand. I'm raising my price to $103”. The large buyer then says, "Ok, I'll bid $102". Our inside-market moves to 102/103.

The 6th seller says, "Wow, I can get $102 for certain execution now and just a few minutes ago I had to settle for only $100… I'll take it!" He hits the bid. Cumulative delta is now -600.

The large buyer is now getting a little anxious for the complete fill because he can see that the price keeps increasing. He decides to buy 300 contracts at the offer ($103), but since there are not more than 100 lots at each price, he ends up sweeping the 103-104-105 prices with that market order. Delta is now -300, and the bid/ask inside-market has moved to 105/106.

The last seller decides to just hit the bid now at $105, and the buyer takes his last fill of 100 contracts to complete his 1,000 lot order.

Cumulative delta is -400.

So was this price action bearish? Of course not! Price is higher, and yet cumulative delta trended lower the entire time. The mechanics of that evolution trace directly back to the collection of participants and their intent (or needs) at the time. If a trader happened to look at the cumulative delta when it trended down, hitting a nadir of -600 (with a 102/103 inside market), and then interpreted that as a sign of bearishness — choosing to short the market in question — that trader would have been subsequently caught up in the sweep higher that occurred across the 103-105 price advance and possibly had themselves stopped out in the process.

 
 
syswizard's Avatar
 syswizard 
Philadelphia PA
 
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Nice explanation Woody. So how exactly can CDelta be used effectively ?

 
 
Schnook's Avatar
 Schnook 
Munich, Germany
 
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@WoodyFox 's description was spot on.



syswizard View Post
So how exactly can CDelta be used effectively ?


I'll try to answer this but the "exactly" part might be difficult.

In very broad terms, watching the how price and cumulative delta move in relation to one another can reveal things to a trained eye. Especially when there's a sudden change in behavior.

In Woody's example above, an astute order-flow trader watching a footprint chart on his desktop monitor might have already sensed what was going on when the market had absorbed 500 lots and went 102 bid. This might even be enough for a scalp.

But then, to take this example another step further, once the big guy got his final fill at 105, that bid went away. Now suddenly the other traders offering 106s aren't getting lifted, and when 105s get hit again the price drops. The behavior has changed. Price is now following delta lower.

Again, an order-flow trader would probably notice this and potentially see another scalping opportunity.

Here's an example from crude oil today:



Notice how the first few bars exhibit "normal" behavior - that is, price goes down on negative cumulative delta and up on positive cumulative delta. But then suddenly price goes up while cumulative delta continues to go down (first green arrow). This is a change in behavior that indicates stronger demand down there around that .40 level. Price then proceeds to climb a bit further (nice little scalp) until strong selling pressure re-emerges, pushing price back down, until, a few bars later, price once again diverges from delta, and once again squeezes higher for the next several bars.

It certainly doesn't always work this way, but some traders do find it informative from time to time.

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 loantelligence 
Syracuse, NY
 
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Good examples all..... but when you study Cum Delta...you will find that it works good on some instruments and not so good on others(as directional bias)....the Best would be NQ and MNQ........Worst RTY (only 50% correct) and only about 75-85% on ES and CL and GC...here are some examples...if you are trading NQ or MNQ its about 95% - 98% ...showing a bias....and direction...which is the only instrument that I use it for..and your scalping results are better on a faster chart...i use 5 sec...these examples are 10 sec.

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Cools81
Melbourne, Australia
 
Posts: 24 since Jul 2022
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Happy to be proven wrong but IMO I don't see how CD helps in day trading.
@Floor/ceilings I want to see a liquidity grab/pins etc. to enter.
Pins, Liq grabs biv = abs, algos, exh. WHY do I need CD to tell me that? Its just more info to analyse/confuse.
Why do I care if they withdrew liquidity or absorbed it or exhausted it??? why?
As long as there are pins/liq grabs the instos want to reverse at the FC.
I have my discount, and there is weak liquidity ahead to squeeze.

I personally think its overkill.

Tue 27th - 5 Long


just one example of what im talking about. look at the action at POC/50. CD divergence? how does that help me here?

You should be more concerned with imbalances, weak liquidity, strikes, time of day etc etc. The more shit you have on charts the more pressure you put on yourself.

But as I said happy to be proven wrong. I dont know it all. CD on footprints may be worthwhile. idk. each to their own in the end. Just some friendly input.

 
 
Schnook's Avatar
 Schnook 
Munich, Germany
 
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@Cools81, no one is trying to prove anything here. We're just sharing a bit of information, trying to help eachother learn. Cumulative delta probably isn't useful for most styles of trading, but for a few it can be.

I received a direct messsage from another user with some questions about my previous post and will answer those questions here for the benefit of others.

"1. Where/How can I get those arrows printed on my charts?"
In Sierra Chart, you can create a Spreadsheet System / Alert in which you can write your own excel-based formulae to annotate your charts. The arrows print when a certain user-defined condition is met. Each Spreadsheet System / Alert includes four columns (Buy Entry, Buy Exit, Sell Entry, Sell Exit) that will output an alert based on your calculations in the other columns. To create your own, simply right-click on your chart, choose "Studies," then select "Spreadsheet System / Alert" and start writing your if-then statements. Consult the online SC instructions for further information.

"2. Can I put my Cumulative Delta indicator in panel 2 like your chart which can be below the main chart?"
Yes, just right-click on your chart, select "Studies," then choose "Cumulative Delta Bars - Volume" and under Study Settings, choose Chart Region 2 to have it displayed below your main price graph.

"3. Do you usually trade the opposite, i.e. the breakout you explained in that picture OR do you prefer to scalp quickly whenever there are large lots traded?"
I usually just take a few selective scalps here and there when I think that overly aggressive buyers or sellers might get trapped and need to bail quickly. But I must caution that what I do is completely irrelevant unless I answer a whole lot of additional questions, which I'm not inclined to do right now. Timeframes, periodicities, context and trade management all play critical roles here. Besides, how do you know I'm even profitable?

As @loantelligence mentioned, some instruments provide a much cleaner picture than others. This can probably be attributed to various factors, including things like substitute products and arb / spreading flows. For example, in equity indices, if delta is telling you one thing on the micro ES and another thing altogether on the mini, which one do you pay attention to? Do they cancel eachother out? What about ES vs. NQ, or ZB vs. ZN or even GBL in Treasuries? Or in crude, how do you know that those aggressive buys in WTI aren't offset by equally aggressive sells in Brent or the over-the-counter swap market?

I guess the point of all this is that, in my experience, cumulative delta can have very limited value in very specific applications. Just like anything else there's a time and place for it, and it's up to each individual trader to determine whether it even suits their style or has anything at all to offer them. @Cools81 doesn't see any value in it for what he does, whereas plenty of other traders use it as an integral component of their trading strategies.

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VirtualMark
Birmingham, United Kingdom
 
Posts: 75 since Jul 2022
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I really don't see much use for cumulative delta. Some days the trend can be clearly in one direction with delta pulling in the opposite direction.

It's supposedly showing "aggressive" buying or selling, as they're hitting the market buy/sell. But what about a large institution putting 100 contracts on the DOM? Isn't that more aggressive than me hitting market buy with my 1-2 contracts?


 



Last Updated on September 30, 2022


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