Cumulative Volume Delta (CVD): What It Is & How It Works

What is Cumulative Volume Delta (CVD)?

CVD refers to an indicator that continuously sums (accumulates) the difference (delta) between “market buy volume” and “market sell volume” over a specific period.

Standard volume indicators only show the total transaction volume. CVD, however, specializes in visualizing the directionality of volume—specifically, whether buying or selling pressure is dominating the market.

CVD Calculation Formula

CVD can be calculated using the following steps:

1. Calculate Delta

For each trade, subtract the volume of market sell orders (executed at the bid price) from the volume of market buy orders (executed at the ask price).

2. Accumulation

Sum these delta values sequentially starting from a specified period (e.g., session start).

How does the CVD Indicator work？

The CVD Indicator is calculated by subtracting the “buy volume” from the “sell volume” for each time period, then accumulating these differences over time.

What Delta Signifies

• Positive Delta: Indicates aggressive buyers and intense buying pressure.

• Negative Delta: Signifies sellers are aggressive, with selling pressure dominating.

Divergence of cumulative volume delta

Cumulative Volume Delta (CVD) divergence refers to a phenomenon where “price movement” and “the momentum of market orders” contradict each other.

This is an extremely important signal for identifying trend reversal points and the accumulation by large institutional investors.

What is Cumulative Volume Delta Divergence (CVDD)

Typically, as prices rise, market buy orders increase, causing CVD to rise as well.

However, prices and CVD can sometimes move in opposite directions, a phenomenon known as “divergence.” 

It suggests that underlying supply-demand dynamics are shifting, contrary to the surface price movement.

Example of Bullish Divergence

This occurs when prices are making new recent lows, while CVD's lows are rising.

Although sellers are flooding the market with sell orders, powerful “limit buy orders” are waiting below, countering the selling pressure and preventing it from fully impacting the price.

Example of Bearish Divergence

Despite prices making new recent highs, the CVD's highs are declining.

Although buyers are placing market buy orders, strong “limit sell orders” are capping the upside, and buying momentum is no longer sufficient to push prices higher.

Absorption and Exhaustion Signaled by Divergence

The essence of divergence lies in discerning what is happening in the market.

Absorption

A state where market orders (CVD) are moving intensely while the price remains stagnant. 

This is often seen when large investors use limit orders to “absorb” all opposing orders as they build their positions.

Exhaustion

A state where prices are making new highs/lows, but CVD fails to follow.

This signifies that “trailing market orders” have run out, signaling the trend is running out of energy.

The Role of Volume Analysis in CVD trading

Volume analysis is crucial in trading because volume is the only data that validates the “reliability” and “sustainability” of price movements. 

While price is the “result,” volume represents the cause (energy). Its primary importance boils down to these four points:

Confirming the authenticity of trends (validation)

Even if prices are rising, if volume does not accompany the move, it is highly likely a temporary fakeout signal driven by a small number of investors. 

Healthy Trend: Volume increases as prices rise.

This indicates broad market participation supporting the price advance.

Dangerous Trend: Prices are rising but volume is declining.

This suggests waning buyer enthusiasm and a risk of trend reversal soon. 

Volume as a leading Indicator

As the saying goes, “Volume precedes price.” A sharp increase in volume often precedes significant price movements.

Trend Signals

A sudden surge in volume during the late stages of a consolidation phase signals an imminent major breakout, either upward or downward.

Traces of large traders: Large institutional investors cannot hide their trading volume due to the sheer size of their transactions.

By tracking changes in volume, you can detect where professional investors' capital is moving. 

Identifying Trend Reversals (Major Bottoms/Tops)

In the final stages of a trend, panic selling or overheated buying can cause volume to surge abnormally.

This dramatic phenomenon is called a “Climax.” 

Selling Climax

A phenomenon where prices plummet with intense volume at the end of a decline, followed by a rebound.

This signals that “all sellers have sold out,” and with prices falling, it can present an excellent buying opportunity.

Understanding Liquidity and Risk

Stocks or trading times with high volume offer greater “liquidity,” making it easier to execute orders at your intended price. 

Preventing Slippage

Avoiding the risk of being unable to buy when you want to, or having to sell at a significantly lower price when you want to sell, which occurs when volume is extremely low.

Trading Strategy Using Cumulative Volume Delta（CVD）

Cumulative Volume Delta (CVD) is a powerful tool that reveals the market's “inner workings” and can be incorporated into various trading strategies.

Trend Confirmation CVD Strategy

This is a trend-following strategy that uses CVD as “trend confirmation”.

As long as price and CVD move in the same direction, the trend is likely to continue.

Entry point

• Uptrend: Look for pullback buying opportunities when the price breaks above the moving average and CVD consistently rises.

• Downtrend: Look for sell-on-rally opportunities when price breaks below the moving average and CVD declines.

Stop-Loss: Close positions when CVD's slope flattens, or clear divergence occurs, indicating the trend may be nearing its end.

Reversal Targeting Using Divergence

This is the most common and powerful CVD strategy. It's a counter-trend strategy targeting the early stages of a trend reversal.

When a “bullish” or “bearish” divergence occurs between price and CVD, prepare to enter, aiming for a reversal.

Entry point

• Bullish Divergence (CVD Bottom Rising): After divergence occurs, enter when the price rebounds without breaking below the support line and crosses above the moving average.

• Bearish Divergence (CVD Top Falling): After divergence occurs, enter when the price is capped at the resistance line and crosses below the moving average.

Stop Loss: If the recent high or low is clearly broken, exit the position as the strategy failed.

Utilizing CVD in Range-Bound Markets

In range-bound markets, prices fluctuate within a defined range, but CVD may show a bias toward one direction. 

This suggests significant accumulation (absorption) within the range.

If CVD is suppressed at the upper range limit while prices secretly continue rising, a strong upward move can be expected upon a range breakout.

Entry point 

Enter using a breakout strategy when the CVD slope supports a breakout at the upper (or lower) boundary of the range.

Risk Management Approach

CVD is not a universal solution and should never be relied upon alone in any strategy.

• Stop-loss: Divergence is merely a signal indicating “potential” and often fails to materialize. Always set a clear stop-loss level.

• It's crucial to combine CVD with other technical indicators, such as MA, RSI, or oscillators, to build additional confirmation before entering a trade.

Recommended timeframes

CVD reliability varies by timeframe.

Longer timeframes, such as 15-minute, 30-minute, or 1-hour charts, tend to reflect market participants' intentions better, making divergences more likely to be effective.

Mistakes to Avoid with CVD Trading

CVD divergence is powerful, but relying on it alone is risky. Here are a few mistakes traders need to be aware of.

Do not enter CVD alone

The CVD divergence does not guarantee an immediate reversal.

When the trend is strong, prices may continue rising while maintaining divergence.

Combine it with horizontal lines, such as support and resistance levels.

Impact of timeframes

Divergences on short timeframes (1-minute, 5-minute, etc.) are prone to false signals. Divergences occurring on longer timeframes, like the 1-hour chart, are more reliable.

Presence of noise

In low-liquidity markets or extremely short timeframes, accurate data may not be available, potentially generating false signals and making them less credible.

Conclusion  

Cumulative Volume Delta (CVD) accumulates the difference between buying and selling volume, revealing the strength of buying and selling pressure that cannot be discerned from price alone.

However, CVD is not infallible; enhance its reliability by using it alongside other indicators like support and resistance lines.When applying it to actual trading, select markets with high volatility and utilize it while practicing appropriate risk management.