• Jan

Delta divergence



When it comes to indicators my preference is usually to not use them and just use price, volume and tape, but delta bid/ask indicator is exception because it does provide insight into orderflow that price itself might not reveal. A good tape reader would see what delta bid ask indicator displays, but delta is a good way to "chart" the tape action and make the whole level 2 absorption easier to read, and especially less maintaining to do so.


The basic function that delta indicator provides is that it segregates the orderflow by aggression, mainly showing market orders that hit either side of bid and ask, depending if it is buy or sell order. For example if buyers are initiating into ask then delta will display green prints on indicator, if sellers are initiating into bid then delta will display red prints on indicator.


Basic concept of delta divergence to use it as edge based info in trading (examples shown for bullish setups, but same in reverse applies for bearish price setups):





Delta indicator by itself does not mean anything, it is important that trader always overlays the action of delta into the context of price. Taking it out of context will provide trader just deceptive information. Thus to use and read the delta, always compare how much has delta moved in last 10 minutes, relative to how much has price moved. And also which direction, are both delta and price moving in same direction, or is there strong divergence, for example price going up slowly but delta is dropping with strong red prints. Divergence will basically highlight that strong limits are absorbing the counter orders.



Three main concepts to trade with delta bid/ask indicator


-absorption

-soaking

-stuff



Absorption


Absorption is the most frequent pattern given by delta, since they are most common way for market to distribute the orderflow. The basic premise of absorption is that one side of market keeps re-freshing with new limit orders and the counter order flow is spending a lot of fuel eating into those orders, but eventually chances are that initiator will fail as the market sentiment shifts.

For example if buyers keep pressing with initiation on ask, and delta shows strong upward increase but price is unable to push then limit sellers are re-filling and if such action keeps insisting over minutes or hour, chances are that buyers will exhaust themselves and sooner or later new wave of market order sellers will come in and push the price down. Thus this is the concept where buyers spend a lot of fuel trying, but sellers just keep re-freshing with limit sell orders. Delta will in such case move strongly up over time while price will be more flat. Divergence.


When it comes to absorption it is very important that trader is always comparing / weighting the price moves and delta moves over time. Current 5 minutes of delta / price action relative to past 30 min, past 30 minutes relative to past 60 minutes, always weight the context. Because if context is not weighted properly eventually trader will see fictional story trough delta indicator.


Offers absorption:



Soaking



Soaking is stronger pattern than absorption. It is usually not general market that is causing it, but instead single hidden large trader with limit order absorbing large portion of counter-orderflow around very specific price area, often very tight price area. This process can last 1 minute or it might last 20 minutes on average. Strong soaking is usually very visible on delta by huge disconnect of price and delta (for example delta dropping very strong but price is completely flat). General difference between overall market absorption and soak is that, absorption is often caused by many sellers stacking limit orders around key levels, while soaking is single hidden trader (not visible on Level 2) that is swallowing orders because he does not want other traders to front-run him.



Soaking:



Stuffed breakout



Stuffed moves are usually around very strong obvious resistance or support levels where many traders will initiate breakout entry. Very often around HOD / LOD levels. Once breakout is in progress the buyers will start pressing with ask aggression which will be shown on delta indicator increasing with green prints, but the breakout has very little progress. Buyers keep pressing 1-3 minutes but price is barely moving. This is often due to large seller (hidden often) that is unloading large sell position right around there. Once the buyers exhaust chances are that strong selloff will initiate as all the buyers realize that now many traders (longs) are stuck around the same price and were unable to push the price up. The key to look on delta is how much exactly has delta moved at key breakout location relative to overall action inside whole structure, there should be very notable difference.

And vice versa can be used (but flipped around) for breakdown that is stuffed.


Stuffed breakout:



Overall delta is just better visual presentation of certain orderflow from the tape and might especially be helpful to traders who are struggling to make sense out of tape, or traders who do not want to be glued to watching Level 2 movements whole day and prefer more relaxed read. But mind that delta will not provide all the information that Level 2 / tape does, because it by default only highlights one portion of orderflow on each minute (either stronger buyers or stronger sellers overall). Best approach is to use it in combination with Level 2, especially around key news events when the level 2 might be extremely crowded and hard to read.



Examples


Bellow is example of absorption from sellers around key supply level. Price initially dropped from the poor news report and then buyers came from the bottom with strong buying. Notice the delta went all the way back up to where the drop of delta initially started, but price itself has not reclaimed that level at all, it was far bellow. Sellers have absorbed the buyers around the bottom at supply levels.


Concepts to check is: Where did price move start relative to where did delta move start, and where is price now relative to where is delta now. The basic concept to identify the absorption.



Bellow is example of absorption, very strong buying pressure into supply and the sellers are re-filling the limit orders around the supply which is absorbing the buying pressure of buyers. Eventually the buying pressure drops of and the price rejects supply and drops.



Bellow is example on how delta might be helpful in trading supply takeout pattern (pattern explained on blog article "supply takeout"). If price is progressing with higher lows into supply but delta remains in negative territory across the structure it shows that buyers are absorbing slightly more than sellers across the structure. Especially if price is able to breach supply on very weak buying power such as example bellow it shows that there are no strong sell limits participating around that supply / resistance. This is effective way to see if that resistance has chance to hold or is more likely to fail.



Bellow is example of soak under strong bullish catalyst flows where initial 2 bullish waves, the sellers stepped in strongly on the consolidated structure ,but the price was unable to drop. Delta dropped far bellow where the initial price move started (first blue rectangle) but the price was actually far above that initial start of move. In that consolidated structure there was hidden buyer soaking up all the sell orders. This gives trader two way to trade such info:


-Long and joining the bid soaker in expectation that all sellers will eventually be absorbed and price will move high as new buying wave comes into market

-Short expecting that bid soaker to fail and if he does strong flush might be result of it



Bellow is example of flat shelf soak where bidder wanted to soak price around precise price level. Notice the key differences between highs and lows of delta and price, there is major disconnect in each of those extremes. Price making higher highs, while delta is under lower highs, delta droping with lower lows, but price is holding flat or higher. Bids absorbing the sellers.



Bellow is example of accumulation setup (explained in other blog article "accumulation play") while using delta as guide to identify accumulation correctly (bids absorbing the sellers across the structure).

Again the ratios matter between major price moves and delta moves. Initial move (blue line) started very deep while the delta reached the lows of where the move started, the price remained far higher and did not retrace. Those are the kind of differences trader should look for.



Example bellow is basically the same as example above.



Bellow is example of stronger absorption / soak where institutional player has absorbed sellers ahead of FOMC report on EURUSD.




Conclusion


Examples shown are from NinjaTrader platform using custom delta indicator. There are many options in regards to delta indicators, some are provided with certain NT packages and some are custom built by third party developers. Such indicator can be used on ES/commodities/Forex futures and equities (with extra data purchase per month).

Using delta is nice combination to the Level 2 as it provides trader with more overall concept on what was happening to orderflow over last hour or so, as with just watching tape trader might forget the whole concept (its easier to remember picture with few graphs than 1000s of orders that just went trough over hour). Such indicators are also usable in other futures platforms, perhaps even some equity platforms, the most important is that platform requires level 2 / tick orderflow data otherwise the indicator will not display things correctly.

For anyone looking for such indicator just google around "delta bid ask indicator" or "orderflow suite" for NT or other futures platforms.


Those three are most common platforms providing reliable bid/ask data:

-SierraCharts

-NinjaTrader

-MarketDelta


It is as well important to be patient and wait for solid opportunities, this indicator is not just a basic RSI or Stochastic indicator that provides some B grade opinion on overbought or oversold information of price every 10 minutes. Bid/ask delta indicator might display a decent orderflow pattern only once or twice a day on traded asset. For this reason it is much better option to track many patterns and hunt around rather than just sit on single asset and watch every tick, that way chances for better quality setups increase.


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