Order Flow Basics: Delta

Today, I want to show you a good way to use order flow information in order to catch a possible market reversal. In the first hour of the market session in the example below, there were good opportunities to short DAX, German Equity future, and exploit order book indicators.

So I am about to simplify it down by showing only one trading tool that is based on Delta. Obviously this is only a piece of the bigger picture, but it is a good place to start.

For those who are not familiar, Delta is defined as the net difference between buying and selling strength, so the difference between volume traded at bid price and volume traded at ask price. Thus, a positive result of delta indicates that buyers are more aggressive than sellers, while a negative read of Delta suggests that sellers are more aggressive than buyers.

For today, what I want to emphasize is that volume traders can identify market reversals by the study of Delta’s information: divergence between price and Delta indicators is the easiest way to do it.

Below you will find an example of the concept of divergence;
So we should pay attention to possible divergences between price and Delta indicators in order to catch market inversion. Remember divergences are more reliable if they occur at market tops/bottoms than in the middle of the range.

Now, let’s see what happened in the first hour of the trading session on DAX future, and how to exploit Delta’s information:

Divergence is easily recognised in the chart above: Dax Future made higher highs, while Delta indicator made lower highs suggesting that buyers were losing their force. As a result, I went short at 10018 price level and closed my position at 10000 price level (VWAP level) gaining 18 points, but DAX kept going short to 9985 price level.

But the Delta indicator is not the only thing that pushed me to enter into the market since I have simplified what we are doing at LittlefishFX, but I believe readers can add this easy approach to their trading style as a useful first step.

The Delta indicator is available on the Ninjatrader platform as part of its default indicators. Our technology is working on a professional platform for Order Flow and Volume Trading.


— Learn and discover more about Delta and Volume trading with our Forex Trading Course. To find out more or purchase the course, click here —

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