What is Cumulative Delta?March 30th, 2022
In order flow trading, Cumulative Delta is a helpful tool for analyzing buying and selling activity inside of the futures market. The ‘delta’ in the name refers to the difference between buying and selling activity at a specific price level and timeframe. This information is then ‘accumulated’ over time and plotted on a chart indicator.
Don’t worry if this still seems super complicated! In his recent NinjaTrader Ecosystem webinar event, Finding Reversals with Cumulative Delta, Optic Trading President Adam Ryan laid out exactly what this means.
First, it is important to understand the term ‘market order’. A market order is a buy or sell order that will be filled immediately at current market price. These kinds of orders are considered ‘aggressive’ because they are filled immediately, regardless of price. This is also known as ‘selling at the bid’ or ‘buying at the ask’.
Ryan defined delta as “the difference between trades transacted at the bid vs. the ask”. He imagined a scenario in which five trades transact at bid while ten transact at ask. In this case, the delta would be +5, because there are five more buyers willing to purchase at the asking price than there are sellers willing to trade at bid price.
A Cumulative Delta chart shows this information cumulatively, or over a number of prices. As price in the market goes up and down over time, a cumulative delta chart will show the delta at each price in the same timeframe. In many cases, delta will mirror the price movement in the market. When price goes up, usually so will delta. When price drops, delta will often do the same.
However, Ryan said that you can gain key information from instances where delta does not follow market price. He gave an example of a consolidating market in which delta dropped rapidly in the same timeframe that price remained stable. This indicates that more trades are transacting at bid, meaning there are buyers “absorbing price” while sellers “push into them”. Ryan said this information is helpful in understanding who is taking control of the market.
Ryan was clear that cumulative delta cannot operate as a standalone system, though. While it may be helpful in identifying absorption, he does not recommend using cumulative delta as a system to trade on by itself.
If you are interested in learning more about cumulative delta, you can watch this short clip in which Ryan expands further on what cumulative delta is and how it can be useful in futures trading.
Also, be sure to check out Adam Ryan’s full-length webinar, as well as the full library of free trading webinars available from the NinjaTrader Ecosystem. You can also see a schedule of upcoming events and register to attend live by visiting the Free Trading Webinars page.
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