Liquidations Maps & Cumulative Volume Delta
In this article we will show how we can use the cumulative volume delta indicator (CVD) to confirm a trading signal from the Kingfisher’s liquidation maps.
(We will consider the Bitcoin futures in this article, but it applies to any future market).
The Cumulative Volume Delta (CVD)
In the current crypto markets, volume remains one of the most important indicators of overleveraged traders’ participation (“gamblers“).
A common way to get a sense of the buying and selling dynamics into a market if by following the Time & Sales information (T&S) generated by participants entering trades using market orders.
However if you have watched the tape for more than 5 minutes, you know that this can be a challenging task.
At this point the CVD comes in handy. It’s a running total of the volume delta (in short VD), which is the difference between the market selling and the market buying volumes that are coming into the market place within any given timeframe.
The CVD can show us mainly two things:
- The volume imbalance between market buying and market selling orders, and hence which is the dominant order flow during the studied timeframe
- The impact the dominant order flow has on price (or the impact this flow limit order players aka the heavier hands, allow it to have).
Now, why is that important?
Arthur Hayes, the CEO of BitMEX briefly explains why:
So, what we can detect with CVD is the presence of late FOMO buyers / sellers, chasers and overly motivated breakout traders in the market. In short, the special breed of market participants that are — unintentionally — selling the lows and buying the highs. Those also tend to be the players letting their positions liquidate.
This corresponds nicely with The Kingfisher’s liquidation maps.
Combined with the Kingfisher’s Liquidations Maps
Have you ever had your long liquidate at a bottom?
Or you short liquidate at a top?
Before the market brings the price back to where you wanted it?
In the following example we see that the liquidation map at point 2 shows us that the 18 850 price area is a major cluster of liquidations.
The price chart shows us that there is net selling coming into the market already prior to the low marked at point 1 when CVD slowly diverges from price while the market drift towards the low.
The CVD, and the volume delta at the bottom, then shows us that selling accelerated into the 18 850 low, yet, the price did not drop as much as we could have expected, given the amount of selling that came into the market. This tells us that sellers did not get the price decrease they were looking for and are therefore starting to get a bit frustrated. This also tells us that in parallel, passive buyers were willing to step into the market at this price level with bids to take the other side of the trade and “absorb” all the selling.
Once price starts to tick up as the former passive buyers now turn to takers buying the price up with their own aggression, all the shorts from below the 18 900 price level start getting nervous; once price ticks up even more, all the shorts from the sub 19 000 price level become in trouble and need to eventually bail out or get liquidated. This is causing a bail out cascade dynamic which can drive price up in a strong move as all the shorts need to cover their positions through stop-losses or liquidations (for highly leveraged traders on such low timeframe), in turn generating even more buy flow supporting the up move.
Welcome to the game.
And it all started with a significant liquidation cluster first indicated by the Kingfisher’s Liquidation Map.
Side note on CVD
Reading the CVD for BTC perpetual swap contracts (futures) is different than for BTC spot markets on spot exchanges (You can try this by activating/de-activating exchanges on The Kingfisher as shown below).
The reason being that in BTC Perpetual Futures, market buying and market selling is equally easy for both sides as opposed to BTC spot markets (where it is either not possible at all to sell short BTC or one would need to borrow BTC first, like when selling short stocks). The same ease of being able to buy or to sell perps is what makes BTC perps more representative of participants to express their emotions in impulsive trading…
See Arthur Hayes quote above.