CVD does not tell you who is buying. It tells you who is in a hurry.
Hi trader,
when I closed the order flow series I left one thing hanging.
I said that CVD, if we ever talked about it, deserved a piece of its own.
Here it is. And it is the one where I risk annoying you the most, because it touches the indicator everybody sticks under their chart and almost nobody reads for what it is.
Let me tell you straight away how I used it badly myself, so we get that out of the way.
I had put it under the price and I was drawing divergences on it the way I used to draw them on the RSI ten years earlier. I found dozens of them. You will find dozens too, if you do that.
After a few months the conclusion I had reached was that order flow does not work.
The right conclusion was a different one: I was using a measuring instrument as if it were an oscillator.
Ok, vamos.
The arithmetic, in three lines
In the first episode we opened the candle up and saw that every fill has a side: there is the one who was waiting with a resting order, and there is the one who went and took it, paying the spread.
Delta is the difference between those two, bar by bar: buy aggression minus sell aggression.
CVD, meaning cumulative delta, is the same thing summed over time. A line that rises when the hurry to buy is in charge, and falls when the hurry to sell is.
That is all. There is nothing else inside it.
And now the sentence that changes everything
CVD does not measure how many are buying and how many are selling.
It cannot, and this is arithmetic, not opinion: in every single trade the quantities bought and sold are identical by definition. If somebody bought ten contracts, somebody else sold them ten. Always. There is no such thing as a candle where “they bought more than they sold”.
What is not identical is which of the two was in a hurry.
So:
CVD measures who is in a hurry, and which side they are on.
Read that again, because everything else in this piece descends from that line, mistakes included.
The right way to read it: it is the effort, not the result
If CVD is the hurry, then it is the effort. And price, which is the result, sits on the other side of the scale.
Taken on their own they say almost nothing.
They matter when they do not add up.
Look at the two highlighted rows in the figure, because they are the only two that count.
Lots of people in a hurry to buy, and price not going up.
At that point the right question is not “who is buying”. The question is: who is on the other side taking all of them?
The three reasons a divergence appears
And here we get to the part that makes reading this far worthwhile.
Price makes a new high, CVD does not. The famous divergence. On the internet they sell it to you as the signal that gets you the high of the day.
The problem is that the very same picture comes from three different situations, and only the first two are interesting.
One, real absorption. There is a big resting order sitting there taking all the aggression and reloading as they eat it. That is the one we care about, and it is the one we covered in the second episode. You check it on the book, not on CVD.
Two, the iceberg. A huge order shown in small slices. On the book it looks small, in reality it is a wall. Same dynamic as the first, except you cannot see it: you infer it from the fact that the level holds without showing size.
Three, and this is the one nobody tells you about: there simply is no aggression on the other side.
Price rises, CVD does not rise, and not because somebody is absorbing.
It rises because there is nobody selling.
The sellers got out of the way, the road is clear, and price drifts up without anyone having to pay to carry it there.
That third one is the majority of cases, and it is why a divergence on its own is never enough.
Because the first two say “there is a wall”. The third says “there is nothing”.
And on the chart, under the price, they have exactly the same face.
A case of mine, and the mistake I made with it
ES, 6 August, two screenshots ten minutes apart.
I am telling you about it because I got this wrong first, and the mistake is exactly the one this piece is supposed to teach you to avoid.
At 12:10 price was at 7,756.25, with the book showing a fresh ceiling of sell orders just above, and further up the sellers pulling themselves out of the way.
At 12:20 price was at 7,760.25. The ceiling had not held.
Ten points of upside. And underneath, cumulative delta was reading -239.
My first read was this one: CVD is negative, so nobody is buying aggressively, so that rise is not a push, it is a void.
It sounds good. And it is wrong.
Look at the figure, and look at the slope instead of the number.
Between 12:04 and 12:07 CVD had sunk below the -400 mark. From there it climbs without stopping, and across the window of the rise it goes from roughly -380 to -239.
Which means that over those ten minutes delta was positive by a hundred and something contracts. Somebody was buying and paying the spread, very much so.
That -239 was not describing the rise. It was describing the selling from twenty minutes earlier, still sitting inside it, because CVD is cumulative and carries everything since the last reset.
The level tells you where you are coming from. The slope tells you what is happening now.
And if you go back to the table from earlier, this case is not even a divergence: CVD rising, price rising, first row, normal, nothing to read. Effort and result added up.
It took me months to stop looking at the number and start looking at the tilt. If this piece saves you those months, it has done its job.
Two notes on this example, because I would be annoyed if nobody gave them to me.
These are two photographs, not a recording. They say the transition happened, not whether that ceiling was eaten or pulled.
And it was 12:20 in Europe, meaning US pre-market on the ES: thin book, few participants. Pulling size when there are few people around costs little, and the same read at 15:30 carries far more weight. Do not take the midday ruler and use it at the Wall Street open.
And the clean case of the third reason, the one where there really is nobody on the other side, I do not have in a single screenshot yet. When I capture it I will publish it. Better a hole I admit to than an example that proves something else.
The three traps, and all of them need saying
One. CVD depends on how it is calculated. Every platform decides in its own way how to classify fills, and the results are not identical. There is no “true” CVD and there is no best setting. What matters is knowing how your tool calculates it, and using one only. Comparing the CVD of two different platforms is like comparing two watches set by two different people.
Two. It is cumulative, so it depends on where it starts. A CVD starting at midnight and one starting at the cash open tell two different stories about the exact same afternoon. The absolute level means nothing: only the shape inside the window you chose matters. Pick one and keep it.
Three. On rollover days CVD is garbage. Volume splits across two contracts and the series stops making sense. It applies to volume, it applies to open interest, it applies here. Mark the quarterly rollover dates on your calendar and do not play doctor on those days.
And a note that concerns a lot of you: CVD is read on the future, where the volume is real and centralised. It is the structure I work with and I have always declared it: analysis on the future, execution wherever you trade. A CVD calculated on an instrument without centralised volume is not measuring what it thinks it is measuring.
“A sold rally”
Two words about this expression, which you will hear everywhere.
In the head of whoever says it, it means: price is going up but CVD is going down.
The fact itself can perfectly well be true. It is the conclusion they pull out of it, namely “so now it goes down”, that does not hold.
First, because it can be the third case: there is no aggressive selling, so CVD does not go up, but price goes up anyway because there is no supply.
Second, and more importantly: it is not an entry, because it does not tell you where to enter. An entry is a price. A divergence is not a price, it is a shape.
The line to take home
A divergence is not a signal. It is a question.
The question is “who is absorbing?”, and the answer is not on the CVD. It is on the book.
I look at the book in the DeepDOM.
Two lines of transparency, which feel owed: that above is an affiliate link. If you use it and subscribe I earn a commission, and you don’t pay a cent more.
If you look at the book and there is nobody there, the answer is “nobody”, and then there was nothing to see in the first place.
Used well, CVD is a confirmation that adds to a level you had already marked this morning. It is never the reason that level exists.
Which is also why, in my order of switching instruments on, CVD is the last one. Not the first.
What you do from tomorrow morning
Small homework and for a week you do not trade it, as always.
Mark down ten divergences. They do not need to be pretty, take the first ten you see.
For each one, at that same moment, look at the book and write one single word: was there real size on that level, yes or no.
Then wait and write down how it ended.
At the end separate the two groups and count them.
What almost always comes out is that divergences with size on the book and the ones without behave differently, and that the ones without are the majority.
After that homework you will never look at CVD on its own again, which is exactly the point. If you don’t have a place to keep the notes, the TradingBlog Diary is free and exists for this.
CVD measures who is in a hurry. The book shows who is standing still. Looking at only one of them is like listening to half an argument.
Let me close with the thing that saved me the most money in this whole story.
It was not learning to read CVD.
It was stopping asking it for what it cannot know.
It tells you who was running. Who was standing still on the other side, and whether they were big, that has to be told to you by a different instrument.
When two different instruments tell you the same thing, that thing stops being your opinion.
Suerte Amigo!
Tiziano Brunno
Tradingblog
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