kurtsmock
Education

The Delta of Volume Explained

KRAKEN:XBTUSD   XBT / USD
This is the first part of a tutorial series I will develop about trading concepts I use that are not well understood. I am using BTCUSD specifically, but the general ideas apply to every tradable asset.

Volume is the amount of force applied to the market in both directions, buy and sell. It is "Ipso Facto" (by the fact itself) that force moves objects, with the object here being price. So, the amount of Buy Volume pushes the price up, Sell Volume pushes it down. But these orders are being executed every second of every day. What happens if 100btc is bought and sold on the same tick? The two forces neutralize each other.

Delta is the "Net Force" being applied to the market. The buying minus the selling. Delta doesn't tell us anything about how thick the order book is. Thus it does not tell us anything about the speed of movement of the price (in fact ignore order book thickness for now). However, The question delta answers is: "Who is DOING what?"

Who = Market Participants
What = Buying or Selling

We know institutions are profitable because otherwise, they would be out of business. We also know they move the most volume . Since they are generally profitable and have the largest volume footprint, we can assume they're betting on the correct future direction of the market and their activity will be visible in the volume . So, what if we just watched what they are doing? That's essentially the delta, the net of all the whales' buying and selling. There are many complicated strategies they will deploy that involve both buying and selling in different ways at different times (using futures and spot, meaning futures and spot are both independently important).

Watching the delta is to pay attention to its direction and rate of change . By doing this we can see what is happening in the and then when there's a strong current, you jump into it like Dude Crush from Nemo into the EAC, the East Australia Current.... duuuuude.

I have found that market orders are, in fact, responsible for price movement. That is to say, I have yet to see a period where the price is dropping and delta is not also dropping. It MAY be positive still, but it drops lower. So, that implies that Delta indicates the current direction and provides information that can predict future direction. (Also, it seems to me that, futures drive direction more than spot at this time)

Feel free to ask any questions about this you have. Thanks for reading.
Jan 07
Comment: Two Important Notes:
1. This ONLY applies on an intraday basis. A massive counter-trend trader could show up at any time, so the further you extrapolate, the less likely you are to be accurate. Delta can only tell you what has happened and what is happening NOW. Thus, Price Action (s/r) has to be coupled with this for trading decisions.

2. How Granular? Buys and sells volume can go as high as millions of dollars a minute, so how granular can we go?
On Tradingview we are limited by the 1m candles. We don't have individual order execution data. So, the closest proxy we have for delta on TV is the 1m candles. This means all the volume in a green 1m candle will be designated as buy volume. All the volume in a red 1m candle will be sell volume. I have order execution data on another platform and there are other ways to watch it (like watching the indicator value instead of the graph). But you cannot have perfect accuracy on TV regardless.

Comments

Hi when measuring the force are you using the candle body or the high low. P.S love your multi exchange volume indicator
Reply
kurtsmock DannyBaker
@DannyBaker, Thanks a bunch =) the force is based purely on the volume. So, price is in no way considered in the calculation of the Volume Delta. It's just buying volume - selling volume.
e.g.
Volume for 5m bar = 1000. Buy Volume = 600. Sell Volume = 400. Delta = +100 for that bar
Volume for next 5m bar = 1000. Buy volume = 400. Sell Volume = 600. Delta = -100 for that bar
the two bars together are (100 - 100 = 0)
Between the two bars all force has been neutralized.

Now, to your question... well how far did price move then? We have no idea. Could have stayed still could have moved $100. But using delta we can tell who is pushing and how hard they're pushing. (at least approximately given tradingview's limitations.)
Reply
DannyBaker kurtsmock
@kurtsmock, Hi again sorry not getting it

a. how do you determine what is buy volume and what is sell volume in one candle
b. "Volume for 5m bar = 1000. Buy Volume = 600. Sell Volume = 400. Delta = +100 for that bar" 600 + -400 = 200 what am i missing..
Reply
DannyBaker kurtsmock
@kurtsmock, @DannyBaker, oh i think i see you are getting the delta between 2 candles
Reply
DannyBaker DannyBaker
@DannyBaker, Actually no still lost
Reply
kurtsmock DannyBaker
@DannyBaker, Yea good catch.. So in a single 1m candle, we know there is buying and selling happening. This is where we run into the problem of TradingView's data limitations. If we can only view data down to the 1m. Then we can't isolate individual buys and sells within one-minute candles. So, we have to come up with a way to figure out the balance between buyers and sellers. With me so far?

So, we need a proxy, a way of approximating which volume is bullish and which is bearish since we don't have the actual buy/sell data on TV (You can get it on other platforms but that doesn't help you with Volume indicators on TV because you can't import it). So, the closest we can get is to assign the volume to buyers and sellers on a 1m candle basis.
Thus, The total volume in a red 1-minute candle will be treated as Selling Volume and the total volume in a green 1-minute candle will be treated as Buying Volume.
This is not perfectly accurate, but it is as accurate as TradingView will allow and based on my studies, it works as a good approximation.
So to get the volume delta, you have to SUM a series of 1m bars. Green bars increase the number, Red Bars decrease the number.
When viewing the 1m timeframe, it is calculated exactly the same as the OBV or the "Net Volume" indicators.
Doing this gives you a number that is representative of the net force being applied to the market over any user-designated lookback period.
How bout now? Make sense?
Reply
DannyBaker kurtsmock
@kurtsmock, Ha yes got it! thanks!
Reply
DannyBaker DannyBaker
@DannyBaker, can you get lowe time frame data? i seem to remember you can only go higher on TV.
Reply
DannyBaker kurtsmock
@kurtsmock, How is it for Divergence?
Reply
DannyBaker kurtsmock
@kurtsmock, Like this?

// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © DannyBaker

//@version=4
study("Volume Force")

SessionPeriod = input(15, title = "Session Period In Minutes")

volumeForce(chartPeriod)=>
prevClose = security(syminfo.tickerid, "1", close, gaps=barmerge.gaps_off, lookahead=barmerge.lookahead_on)
prevOpen = security(syminfo.tickerid, "1", open, gaps=barmerge.gaps_off, lookahead=barmerge.lookahead_on)
prevVolume = security(syminfo.tickerid, "1", volume, gaps=barmerge.gaps_off, lookahead=barmerge.lookahead_on)
Vol = prevClose >= prevOpen ? prevVolume : prevVolume * -1
vlForce = sum(Vol, chartPeriod)

plot(volumeForce(SessionPeriod))
hline(0)
Reply
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