CVD (Cumulative Volume Delta) is a volume-based technical analysis indicator that provides a visual representation of market buying and selling pressure by calculating the difference in trading volume between market buyers and sellers. Looking at price charts alone, we can only know whether prices have risen or fallen, but it's difficult to understand the real reasons behind it—whether there is truly a large amount of capital buying and pushing prices higher, or if it's merely a temporary fluctuation in market sentiment. It is precisely in this context that CVD (Cumulative Volume Delta), this technical analysis indicator, emerged to provide market participants with a new perspective to understand the comparison of forces between buyers and sellers.
The CVD indicator is not just a simple volume statistic; it is a comprehensive reflection of market sentiment and capital flow direction. By precisely calculating the cumulative difference between active buying volume and active selling volume, CVD can help traders identify potential trend reversal points, verify the sustainability of current price movements, and discover divergence phenomena between price and volume.
Core Mechanism and Technical Principles of CVD
CVD (Cumulative Volume Delta) is a volume-based technical analysis indicator that provides a visual representation of market buying and selling pressure by calculating the difference in trading volume between market buyers and sellers. The core of this indicator lies in distinguishing between aggressive buying transactions and aggressive selling transactions, and accumulating these differences through cumulative calculation. Specifically, the calculation formula for CVD is: CVD_t = CVD_{t-1} + (Aggressive Buying Volume - Aggressive Selling Volume), where aggressive buying volume refers to the trading volume where buyers transact at the seller's quoted price, commonly known as "taking the offer," while aggressive selling volume refers to the trading volume where sellers transact at the buyer's quoted price.
Unlike traditional volume indicators, the CVD indicator adds up the Delta values of each price bar to form a cumulative Delta value, which is then visualized by plotting this value below the price chart. When the Delta value is greater than 0, it indicates that buying pressure exceeds selling pressure, and prices may rise; if the Delta value is less than 0, it indicates that selling pressure exceeds buying pressure, and prices may fall. The CVD indicator uses intrabar (smaller timeframe) trading volume and price fluctuations to estimate the difference between buying and selling pressure within each chart candlestick. If the intrabar closing price exceeds the opening price, the system considers this trading volume as positive and adds this value to the total volume of the chart candlestick; conversely, it subtracts this trading volume from the total volume.
CVD Applications in the Market
CVD indicator has significant value in trend confirmation. When CVD continues to rise, it indicates that aggressive buying volume consistently exceeds aggressive selling volume, showing that buyers dominate the market, usually predicting the continuation of an upward price trend. Conversely, when CVD continues to decline, it indicates that selling forces occupy a dominant position, potentially driving prices to fall further. In practical application, traders need to observe the consistency between CVD and price movements. When prices rise and CVD simultaneously increases, it shows that bullish forces in the market are strong, and the trend has strong sustainability.
More importantly, the CVD indicator has unique value in identifying market divergences. Divergence phenomenon refers to situations where price trends deviate from the CVD indicator, usually predicting potential weakness in the current market trend. Regular bullish divergence manifests as prices making new lows but the CVD indicator forming higher lows, suggesting that selling forces are weakening; hidden bullish divergence occurs when prices make new highs but the CVD indicator forms lower highs, possibly predicting that buying forces are insufficient to support continued price increases. Correspondingly, regular bearish divergence manifests as prices making new highs but the CVD indicator forming lower highs, indicating that buying forces are declining; hidden bearish divergence occurs when prices make new lows but the CVD indicator forms higher lows, showing that short forces may be weakening.
Regular bullish divergence: Prices make new lows, but the CVD indicator forms higher lows, suggesting that selling forces are weakening.
Hidden bullish divergence: Prices make new highs, but the CVD indicator forms lower highs, possibly predicting that buying forces are insufficient to support continued price increases.
Regular bearish divergence: Prices make new highs, but the CVD indicator forms lower highs, indicating that buying forces are declining.
Hidden bearish divergence: Prices make new lows, but the CVD indicator forms higher lows, showing that short forces may be weakening.
In futures and derivatives trading, the CVD indicator is often used in combination with Open Interest (OI) to form a more complete market analysis framework. This combination can provide four different market situation judgments: OI rising and CVD rising indicates long position opening, meaning increased positions and more buyers; OI rising and CVD declining indicates short position opening, meaning increased positions and more sellers; OI declining and CVD declining indicates long position closing, meaning fewer buyers and long position closing; OI declining and CVD rising indicates short position closing, meaning fewer sellers and short position closing.
The CVD indicator can also be used in combination with traditional technical indicators such as RSI and MACD. This multi-indicator combination can improve signal reliability and reduce the occurrence of false signals. For example, when CVD shows bullish divergence and RSI rebounds from the oversold area, this combined signal usually has a higher success probability. However, it should be noted that any technical indicator has inherent limitations, and divergence signals are not completely reliable, sometimes producing false signals. The effectiveness of the CVD indicator largely depends on parameter settings, and different parameter configurations may lead to completely different analysis results, requiring traders to have rich experience to optimize parameter settings.
