Tips for Using Cumulative Delta to Confirm Price
This week we had our annual online Summer Slam event and one of the themes that came out of it was cumulative delta. Since the "delta" concept is so central to the Footprint, we felt it appropriate to take a break this week and show some examples of cumulative delta. Trading price alone can be a difficult task. Using correlated markets, market breadth, and order flow can be very helpful when confirming a price move. Cumulative delta shows order flow over time.
Cumulative delta plots the underlying order flow for a session or multiple sessions. It is computed based on each trade, so it provides a very accurate reading of order flow for the selected time period.
Common uses of the cumulative delta would be confirm price direction. For instance, if price is trending higher, look for the cumulative delta to be trending higher each step of the way. If price trades a new high BUT the cumulative delta does not, then it may be a sign order flow is beginning to reverse and price will soon follow.
Below is a recent example from yesterday showing a divergence between the price of the S&P 500 (ES) and its cumulative delta. As noted in the illustration above, it is vital to see price and delta confirm each other. Otherwise, it is likely you are just witnessing a test of extremes and price will be rejected or rotate back.
Another recent example from 2 days ago in the ES shows how cumulative delta was not confirming the breakout to new price highs. It is important to note that sometimes price will lead. When this happens, watch out for a violent "catch up" in cumulative delta, often producing a jump in price in the direction it was originally heading.
If you want to add this to your chart do the following:
- Right click the chart and Add Study
- Choose Volume
- Set the Highlight column to Delta Day as shown below.