The volume delta calculates the difference between buys and sells for each candle of an individual market, although there are also aggregated volume delta indicators these days. Note that it only looks at active orders, often referred to as "aggressive" orders, but more commonly known as "market" orders. Let's say that in a one hour timeframe on the Bitfinex BTC/USD spot market there were market buys for a total value of 100 BTC and market sells for a total value of 40 BTC. The volume delta will in this case show a "delta" of +60 BTC for that hourly candle.
The cumulative volume delta (CVD) is the same concept as the volume delta, with the exception that it adds up all market buys and sells (hence "cumulative") and plots the data as a continuous chart. When the CVD trends up it means market buys are dominating on that market, when it trends down it means market sells are dominating.
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When buying is selling and selling is buying
When the CVD goes up it's reasonable to assume that there's a lot of buying happening on that market, vice versa a lot of selling when the CVD goes down. Because of this most people, understandably so, conclude that when the CVD goes up it means that market must be bullish and when the CVD goes down it must be bearish. However, this isn't always the case.
This is why I'm making this post. Buying and selling isn't always what it seems. I want to explain why a CVD going up for example doesn't necessarily mean that market is bullish. Let's take a look at an example of the FTX SOL/USD spot market.
Here's a 15 minute timeframe chart where SOL is mostly grinding sideways with a bit of slope downwards. The volume delta is constantly showing negative values, which means that there's a lot of market selling going on. Therefore the CVD is also going down, a lot. On face value it looks like the FTX spot market is selling off hard. Spot selling off is pretty bearish, isn't it? So should we sell too, or maybe even go short?
The problem with the CVD is that it only shows one part of the story. For full context you would also have to look at the orderbook. So let's do exactly that.
This is that same chart but with a heatmap overlay. A heatmap is simply a visualisation of orderbook history which allows you to see limit orders.
All those long, thick and bright yellow lines are bids with a value of at least 1.5 million USD. It's when those bids get filled that the CVD drops hard. This is because for a passive, or "limit" bid, to fill someone needs to sell into it. So the CVD goes down, suggesting that this market is heavily selling off, but there's actually a whale absorbing all of it.
When a whale passively buys up large quantities of a coin, is that bullish or bearish? I'm sure you know the answer, and I'm sure it won't be a surprise when I tell you that shortly after all of these bids got filled SOL pumped about 25% as you can see in the image below.
Hopefully now it's more clear why sometimes the CVD can be deceiving. It can look like there's a lot of selling going on while in reality a whale is filling his bags.
One more example the other way around for good measure.
Here's the Bitfinex BTC/USD spot market's CVD skyrocketing.
At first glance it looks bullish, doesn't it? The Bitfinex whales, who are by a lot of people considered smart money, seem to be buying aggressively. But let's take a look at the orderbook data again.
Would you look at that, it's a massive sell wall. So the opposite is true, some whale was offloading his bags, but did so passively through small limit orders. After all these asks got filled bitcoin got exhausted and printed a local top.
There's still buying going on of course, otherwise the price wouldn't go up. However when the CVD suddenly makes a sharp move one way or another it could be that someone's filling large limit orders. When people are buying into a lot of supply like with this Bitfinex example, it could result in the market getting exhausted. So this is something to take into account, it might be useful to also take a peek at the orderbook for more context.
That's it for this post.
Until next time!