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Cumulative Delta – simply explained

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We’re going to dedicate this article to beginners who want to understand the Cumulative Delta. Why is it important? Why is it useful? What are the special features of the Cumulative Delta for trading on the stock exchange?

Read in this article:

  • What is the default delta, BIDs, and ASKs?
  • What is the Cumulative Delta?
  • What does the Cumulative Delta show us?
  • How to use the indicator?
  • Advantages and disadvantages of the Cumulative Delta.
  • Use the Cumulative Delta indicator data for your trading decisions.

What is the Delta?

Let’s define what a default delta is before we talk about the Cumulative Delta.

Delta is the difference between buyer and seller. The delta is positive when there are more purchases than sales, and the delta is negative if there are more sales than purchases.

“Each trade has both a buyer and a seller. How can there be more purchases or sales?”

That’s right. Each trade has both a buyer and a seller. However, according to the principle of merging stock market orders, a trade is executed when an initiative market order “fills” an expected limit order – the fill.

When the deltas are calculated, it is assumed that:

  • A sale – when a Market sales order is merged with a purchase limit order (a purchase limit order is also known as BID).
  • A purchase – when a Market Purchase Order is merged with a sales limit order (a sales limit order is also known as ASK).

More information about DELTA can be found HERE.

Example:

Cumulative delta indicator
Delta, BIDs, and ASKs.

The picture above shows a chart of the oil futures. the data are from NYMEX; The period is 15 minutes. The chart shows the BID ASK and Delta indicators.

  1. Arrow 1 indicates the number of initiative purchases.
  2. Arrow 2 indicates the number of initiative sales
  3. Arrow 3 points to the difference (delta) between the first and second numbers.

By the way, pay attention to the market context. Sales (red bars in the delta) were in significant surpluses at 12:45 and 14:15. However, the price does not show a major downward movement. For this reason, the appearance of purchases for the candle in question at 2:30 p.m. provides the ground and the end of the bear crew.

What is the Cumulative Delta?

Well, we’ve defined the delta and we’re going to talk about the Cumulative Delta.

The word “cumulative” means accumulated, integrated, shared, aggregated and consolidated. Consequently, the Cumulative Delta is the indicator that summarizes the delta values for a given period of time.

Example. Let’s add the Cumulative Delta indicator to the oil futures used above.

cumulative delta indicator settings

As you can see, the “CumulativeDelta” indicator summarizes the values of the delta for the previous periods, the indicator “Delta” recalculates each period.

The cumulative delta settings are simple:

  1. The appearance – bars (in the example above), candlesticks, or a line.
  2. Session delta mode. If a check mark is placed here, the delta is reset at the beginning of each trading session. If not enabled, the indicator uses all data loaded in the chart.

The Cumulative Delta indicator in ATAS is calculated on the basis of the tick data in the tape, which is received via a direct connection to the exchange – only in this way is ensured that the indication makes sense.

How do I use the Cumulative Delta?

As a rule, the positive dynamics of the Cumulative Delta indicator means the predominance of buyers and consequently stable price growth. The following chart shows this correlation.

cumulative delta session

This means that the Cumulative Delta indicator data can be used as a simple but efficient confirmation of the up or down trend.

However, there is another way to use the Cumulative Delta. It is the principle of divergence. The following image shows the same graphic, but in a different unit of time to better see the events of August 28.

cumulative delta divergence

Despite the growing sales pressure, the price refuses to fall stubbornly. It is a bullish situation. For this reason, you should avoid shorts and consider purchases.

The following image shows an example of a trading decision in a similar situation on Bitcoin.

cumulative delta footprint

We use the cluster chart with a single Cumulative Delta indicator (in the form of a green line).

  1. In point 1, we had scaling market sales. The indicator bears witness to this. but… what is the price reaction? It doesn’t fall. The bitcoin price offer has not even broken the previous local low (black horizontal line). The ability of the price to stay afloat despite massive sales is a sign of strength. The search for longs looks justified.
  2. If the Cumulative Delta indicator holds its head up (marked with an arrow), it can be used as a trigger for entering purchases.

Here is another example from the oil future.

cumulative delta trend

If you are an intraday trader and trade breakouts, the graph above shows how the Cumulative Delta can be used to consider short positions while testing support.

Pros and Cons of the Cumulative Delta

The main advantage of the Cumulatives Delta indicator is that it works with the flow of actual transactions on the stock exchange. In other words, it deals directly with the trading process. If you are working with the Cumulative Delta indicator, analyze at the same time:

  • Market trends.
  • Activity of buyers and sellers.
  • Price behavior in combination with the delta.

And here there is a drawback – a certain complexity of analysis. You will not receive easy purchase or sell signals from the Cumulative Delta. It is neither a magic wand nor a holy grail. You need to learn how to apply the Cumulative Delta in your analysis.

This training process will help you:

  1. Download the free trial of ATAS (you can continue using it after the 14-day trial period).
  2. Activate the Cumulative Delta indicator as described above.
  3. Test “your” market/period based on historical data. Remember that you can download tick data from our server for any period of time (the following screenshot shows how this is done in ATAS).
  4. Analyze the Cumulative Delta behavior when trend changes and look for repeating patterns.
  5. Train to correctly interpret the indicator patterns based on historical data and then in real time on the actual market.
  6. Do not use your real trading account until you have learned to make profits with a demo account.
Trade History settings / Historical Data

Summary

As practice shows, not all data feeds/providers transmit correct data about deltas that could be used for rational decisions. However, if your provider provides high-quality data about purchases and sales, the Cumulative Delta can become an instrument that improves your trading efficiency.

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