Cumulative Delta Part 2 When Price And Cumulative Delta Diverge

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Cumulative delta in order flow analysis refers to the running total of the delta values of individual trades. Delta represents the difference between the volume of aggressive buying and aggressive selling over time or in a bar.

When delta and price diverge, it means that there is a discrepancy or disagreement between the price movement and the buying or selling pressure indicated by the delta. Here are a couple of scenarios that can occur:

1. Upward Price Movement with Negative Delta: In this case, the price is rising, indicating a bullish move. However, the delta values associated with each trade are negative, suggesting more selling pressure than buying pressure. This discrepancy can be a sign of weakness in the uptrend and could indicate a potential reversal or slowdown in the price movement.

2. Downward Price Movement with Positive Delta: Here, the price is falling, indicating a bearish move. However, the delta values of the trades are positive, suggesting more buying pressure than selling pressure. This divergence may indicate underlying strength in the downtrend, potentially leading to a continuation of the downward movement.

Traders need to pay attention to the divergence between delta and price because it can provide valuable insights into market dynamics and potential trading opportunities. It indicates a potential discrepancy between the price action and the actual buying or selling pressure.

When delta and price diverge, it implies a potential shift in market sentiment or a change in the balance between buyers and sellers. Traders can utilize this information to assess the strength or weakness of a trend and make more informed trading decisions.

However, it's important to note that delta and price divergence should not be considered as standalone trading signals. Traders often combine it with other technical analysis tools and indicators to confirm their trading decisions and to avoid false signals.

In summary, when delta and price diverge, it suggests a discrepancy between the price action and buying/selling pressure. Traders analyze this divergence to gauge the strength of a trend or the potential for a reversal, helping them make more informed trading decisions.