Today we want to discuss an order flow tool that is used amongst many professional and retail traders called the Order Flow Cumulative Delta.
Cumulative Delta is a volume tracking tool, that tracked the sessions total net amount of buyer vs sellers within that market at that session that you are trading and or looking at.
Many professional-level trading platforms have this form of tools available for the trader’s discretional use. Some of the better indicator suites are provided by third-party professional developers that have the experience and know how to visualize this data for a trader to take advantage of and make a better decision on a market bias.
In my following screenshots I am using ninZa.co Cumulative Delta indicator that comes the way you see straight out of the box. I have not modified any settings, or colors. I have however added two Exponential Moving Averages (an 89 and a 233), a VWAP (Volume Weighted Average Price) and my Prior and Current Day Open High Low Close price lines. For my very own discretionary or semi-automated day trading strategies, these levels are very important to me. And we can again see that when we use Cumulative Delta along with an inflection point in a market how much more confident you can make trading decisions.
The ways I like to use this tool is for confirmation at a level or on continuation of a strong flow (trend) day.
The chart here we are looking at is a 15 second chart on the E-Mini S&P500 Micro Futures.
Speculators looking at price coming up to a Prior Day High line, may be contrarian and looking for an opportunity to fade the trade back short. But just as price approaches this level, we see buyers getting very aggressive, a possible attempt to break out and go past this level. Whatever the fundamental or news events may be relative to the action, we can use these tools to visualize the potential of the outcome before it happens. Money management is always a key responsibility of each and every trader, but the opportunity that exists in the market is how the traders interpret and perceive it.
Paying attention to the trading hours is a very important factor. There is no buy here sell here magic system anywhere. Managing the session time of a market where there is more liquidity or not can be very crucial if the system is giving more or less false signals as well. Order flow is not adaptive, it just happens, so be mindful.
In the following photo we want you to observe one, a time of day for the United States Cash Session on the Emini S&P 500 Futures that we arrived at a lunch hour of the session. Approximately 12:00PM to 1:00PM Central Standard Chicago Time.
In this image we see an example of lighter liquidity potentially leading to this Net cumulative delta being rejected, OR it can be absorption. This is important to be aware of when trading with order flow, and specifically the cumulative delta.
Look to see when buyers (price) attempted twice to break upwards. If you were technically traded, you would exercise caution as you see the overall the overall trend was shifted form long to short. We can see the moving averages 89/233 are crossed implying the short trend may continue at least for now. And not once but twice, sellers came back in to validate this information here, and then the selling continued. Buyers gave up.
Here is one reason delta reading can start to fail. When cumulative delta makes a new high or low, but price doesn’t, some people will call this a divergence, but it is potential absorption in the market. Absorption meaning that there are passive sellers or buyers there, filling all the aggressive orders and they are reloading with intent that they are holding supply or demand line up.
At some point one side will win. Just like any visualization tool using other forms of analysis is very important, however combined with some of these amazing tools that are developed for you, it can change your probabilities.