Delta provides traders with the total sum of market orders in any given session.
Experienced traders understand that only market orders move the price action. This is referred to as Active or Aggressive Order Flow.
Conversely, limit orders when filled do NOT move the price action. Institutions and traders with large positions may often choose to sell via limit orders, to avoid influencing the price action in the market.
This is referred to as Passive Order Flow
Active and Passive Order Flows go hand in hand, if no one executed an active/market order then the price would never move.
Delta provides traders with the total sum of market orders in any given session.
Experienced traders understand that only market orders move the price action. This is referred to as Active or Aggressive Order Flow.
Conversely, limit orders when filled do NOT move the price action. Institutions and traders with large positions may often choose to sell via limit orders, to avoid influencing the price action in the market.
This is referred to as Passive Order Flow
Active and Passive Order Flows go hand in hand, if no one executed an active/market order then the price would never move.
A passive/limit order requires an active/market order to fill it.
By now in your trading journey, you should understand that limit/passive orders are not guaranteed to be filled, and market orders will automatically fill on execution at the current market bid-ask price.
It is the market orders that are moving the market, so Delta in its essence, reveals whether buyers or sellers are in control throughout each candlestick.
Key Points of the Lesson
UTILITY
Delta is the sum of aggressive market orders ⇒ buys minus sells. ( And not sells minus buys as mentioned in the video, this will be corrected shortly )
It shows whether buyers or sellers are in control of the current candle.
Delta is useful to determine possible breakouts of a range and reversals at key levels.
IMPLEMENTATION
Footprint software is needed, such as Exocharts.
Monitor delta to help determine whether a price movement is healthy.
Use in conjunction with Open Interest, Volume, and Cumulative Volume Delta.
BACKGROUND INFORMATION
Passive VS active order flow:
Passive ⇒ limit orders.
Active (aggressive) ⇒ market orders.
For passive orders to get filled, an active market order is needed ⇒ price can only move when market orders are placed.
PRACTICAL EXAMPLE
TIPS & TRICKS
Healthy price move: Increase in aggressive market orders (volume), and positive (uptrend) or negative (downtrend) delta.
If volume and delta are decreasing on a move, the price is likely to reverse.
It is possible to have a green candle with a negative delta, and a red candle with a positive delta.
Range trading ⇒ expect a decrease in Delta as the edges of the range are approached.
Range bound price action ⇒ active selling at the top of the range, active buying at the bottom of the range.
A healthy and strong breakout of a range (up or down) is accompanied by strong volume and increasing delta.
Decreasing volume and delta on the breakout/breakdown, signal weakness and a likely reversal into the range.
EXAMPLE FALSE AND TRUE BREAKOUT OF A RANGE
TIPS & TRICKS
Delta clusters show areas on the chart with high delta (dark shading).
An area with high delta can offer a reversal point if interested ⇒ use confluence.
TAKE HOME MESSAGE
Delta shows the market sells minus buys.
Helpful to identify breakouts and reversals.
Combine with volume and open interest.