How to Trade Using CVD Divergences | Day Trading Guide

Summary

This video offers an in-depth guide on using the Commitment of Traders (COT) indicator for trading. It explains the concept of divergences, particularly focusing on 'absorption' as a key signal for potential market moves. The presenter shares personal strategies for identifying and acting on bearish and bullish COT divergences, emphasizing the importance of confirming these signals with structural changes in the market. The video also touches on advanced tips, including the role of open interest and internal liquidity in validating trades, advocating for a patient approach to trading that prioritizes strong invalidation points.

Takeaways

• 📊 The speaker primarily uses the Chaikin Money Flow (CMF) indicator in a line format on EXO charts for visual trading cues.
• 🔍 CMF shows the aggressiveness of buying or selling in relation to price, providing traders with potential insights into market sentiment.
• 📉 The speaker prefers to use CMF for identifying 'absorption', a situation where larger players are buying up orders, potentially offering a trading edge.
• 🔄 Divergence occurs when price makes lower highs while CMF makes higher highs, indicating a bearish scenario that traders can use to their advantage.
• ⏳ Leading CMF can be misleading in real-time trading, as it may suggest a divergence that doesn't materialize, leading to premature trade decisions.
• 🏗️ Structure changes, such as breaking lows or highs, are crucial for confirming CMF divergences and providing a solid basis for trade entries.
• 📉 For a bearish trade, the speaker looks for internal liquidity, which refers to the price action between significant highs and lows, to identify potential short opportunities.
• 📈 Conversely, a bullish CMF divergence is identified by higher lows in price while CMF makes lower lows, suggesting more buying pressure.
• ⏳ The speaker emphasizes the importance of waiting for a clear structure change before acting on a CMF divergence to avoid false signals.
• 🕒 Timeframes used for CMF analysis are typically short, ranging from one to fifteen minutes, to capture quick market movements.
• 📈 The speaker also discusses the importance of open interest within CMF, as it can indicate the presence of trapped traders, potentially influencing the strength of a CMF signal.

Q & A

What is the main focus of the video?

The video focuses on explaining the concept of CVD (Cumulative Volume Delta), its divergences, and how to use it within a real trade scenario, along with advanced tips for traders.

What is the preferred format for CVD according to the speaker?

The speaker prefers to look at CVD in the line format, specifically using EXO charts or similar platforms with the settings provided in the video.

What does CVD indicate about the market?

CVD indicates the aggressiveness of buying or selling at any given point in the chart in relation to price, providing traders with potential insights into market sentiment.

What is 'absorption' in the context of CVD?

Absorption refers to the situation where larger players are taking up orders, showing their potential hand in the market, which can give traders a potential edge if interpreted correctly.

How does the speaker define a bearish CVD divergence?

A bearish CVD divergence is identified when price makes lower highs while CVD makes higher highs at the same location, indicating more buying activity that hasn't been able to push the price higher.

What is 'leading CVD' and why is it problematic?

Leading CVD is when a potential divergence is observed in real-time, but it gets canceled out as the market continues to trend. It's problematic because it can lead to premature trading decisions based on incorrect assumptions.

What should traders look for to confirm a potential CVD divergence?

Traders should look for a structure change in the market, such as a break of a previous high or low, to confirm a potential CVD divergence and provide a stronger invalidation point for trading decisions.

What does the speaker mean by 'internal liquidity'?

Internal liquidity refers to the price action within a certain range, from a local high to a local low, which can provide potential entry points for trades based on the behavior of larger market participants.

Why is it important to wait for a structure change before trading on a CVD divergence?

Waiting for a structure change is important because it provides a clearer invalidation point and reduces the risk of falling into the trap of trading on a leading CVD divergence, which might not materialize.

What timeframes does the speaker recommend for analyzing CVD divergences?

The speaker recommends using timeframes of three minutes, five minutes, one minute, and 15 minutes, and advises against going above the 15-minute mark for analyzing CVD divergences.

How does the speaker approach bullish CVD divergences differently from bearish ones?

For bullish CVD divergences, the speaker looks at lower lows on the price chart while expecting higher lows on the CVD, indicating more selling pressure that isn't driving the price down, which is a bullish signal.

What additional factor should be considered when analyzing CVD?

The speaker suggests considering the open interest within the CVD segments to understand the actions of new longs or potential traps, which can provide further insights into the strength of a CVD divergence.

Outlines

00:00

📊 Understanding CVD and Divergences in Trading

This paragraph introduces the topic of the video, which is the use of Cumulative Volume Delta (CVD) and divergences in trading. The speaker explains their preference for using CVD in line format with EXO charts and shares their settings for optimal visual trading. The focus is on visual cues rather than exact figures to identify trade opportunities. The concept of 'absorption' is highlighted as the speaker's preferred method for utilizing CVD, which involves observing large players' impact on order flow and using this information to gain a potential trading edge. The paragraph also explains how to identify bearish and bullish divergences using CVD and price action, emphasizing the importance of structure changes and internal liquidity levels for confirming trades.

05:02

🚀 Advanced CVD Trading Techniques and Real-World Application

The speaker delves into advanced CVD trading techniques, discussing the concept of leading CVD and how it can mislead traders into false divergence signals. They provide a step-by-step guide on how to confirm potential bearish divergences by looking for structure changes in the market. The importance of internal liquidity and fixed range pools is underscored as key elements for identifying entry and exit points in trades. The paragraph also touches on the use of open interest within CVD to gauge the strength of market movements and the potential for early entry into trades. The speaker shares a personal trade example to illustrate the application of these concepts in real-time trading scenarios.

10:02

🔍 Analyzing Open Interest and Trading Validation

In the final paragraph, the speaker wraps up the discussion by emphasizing the importance of analyzing open interest within CVD to understand the composition of bearish or bullish divergences. They advise traders to base their trades on the source of invalidation and to look for structure changes before committing to a trade based on CVD signals. The speaker also mentions the value of waiting for further confirmation before entering a trade to avoid falling into the trap of premature trading decisions. The paragraph concludes with a mention of the speaker's Twitter account for intraday updates and their EXO charts templates and workspaces, suggesting further resources for viewers interested in the speaker's trading approach.

Keywords

💡CVD (Conditional Value at Risk Divergence)

CVD, or Conditional Value at Risk Divergence, is a technical analysis tool used by traders to identify potential market reversals or continuations based on the relationship between price action and the CVaR indicator. In the video, the speaker simplifies CVD to show aggressive buying or selling in relation to price, which is central to the theme of identifying trade opportunities.

💡Divergence

Divergence in technical analysis refers to a situation where the price and a technical indicator move in opposite directions. In the context of the video, the speaker discusses bearish and bullish divergences, which are key to spotting potential trade entries or exits based on the inconsistency between price action and the CVD indicator.

💡Absorption

Absorption is a concept used in the video to describe a scenario where larger market players are buying up orders, indicating potential market support. The speaker prefers to use CVD in the context of absorption to gain a potential edge in trading by identifying when larger players are active in the market.

💡Leading CVD

Leading CVD is a term used in the script to describe a situation where a CVD divergence appears to be forming in real-time but may not hold as the market continues to trend. The speaker warns against acting on these leading signals without further confirmation, as they can lead to false trade entries.

💡Structure Change

A structure change in the context of the video refers to a significant shift in the market's pattern that invalidates a previous analysis or trade setup. The speaker emphasizes the importance of waiting for a structure change to confirm a CVD divergence before entering a trade to avoid false signals.

💡Internal Liquidity

Internal liquidity is mentioned as a concept for identifying high volume nodes or areas of significant trading activity within a specific price range. The speaker uses internal liquidity to find potential trade entry points, particularly when looking for short positions after a bearish CVD signal.

💡Anchored V-Waps

Anchored V-Waps, or Volume-Weighted Average Price levels, are used in the video to identify significant price levels where a large amount of volume has traded. The speaker suggests using these levels as reference points for trade entries, particularly after a structure change has occurred.

💡Fixed Range Pools

Fixed range pools are levels identified by the speaker as areas between significant highs and lows where a lot of volume has traded. These pools can be used to gauge the strength of a potential reversal or continuation after a CVD signal.

💡Open Interest

Open interest in the video refers to the total number of open contracts in the market, which can provide insight into market sentiment. The speaker advises traders to consider open interest within a CVD signal to understand whether new positions are being opened, which can strengthen a potential trade setup.

💡Trade Execution

Trade execution in the video is the process of entering a trade based on the analysis of CVD signals and other market structures. The speaker discusses the importance of having a clear invalidation point and waiting for confirmation through structure changes before executing a trade.

💡Time Frames

Time frames are the specific intervals used by traders to analyze price action. The speaker mentions using CVD primarily on shorter time frames like 1-minute to 15-minute charts, which is relevant to the video's theme of identifying short-term trade opportunities.

Highlights

The video focuses on explaining CVD (Conditional Volume Delta) and its application in trading scenarios.

The presenter prefers using CVD in line format with EXO charts for visual trading cues.

CVD shows aggressive buying or selling in relation to price, providing insights into market dynamics.

Absorption is the preferred use case for CVD, highlighting when larger players are eating up orders.

Two variables, CVD line and price, are used to decipher absorption or divergence.

Bearish scenarios are identified when price makes lower highs while CVD makes higher highs.

Leading CVD can mislead traders as it is not a lagging indicator and can continue to trend.

TradingView is used to confirm potential bearish CVD divergences by comparing price and CVD highs.

Structure changes are crucial for confirming trades and avoiding false signals from leading CVD.

Internal liquidity and high volume nodes are key factors in determining entry and exit points.

The presenter emphasizes the importance of not taking out the high in validation for a bearish CVD.

Time frames used primarily are 3-minute, 5-minute, 1-minute, and 15-minute for analyzing CVD.

Bullish CVD divergences are explained as making higher lows on price while CVD makes lower lows.

Structure changes are necessary for confirming bullish CVD, ensuring the trade is based on a solid foundation.

Advanced tips include analyzing open interest within CVD segments for additional trade insights.

The presenter shares a personal trade example, detailing the thought process and strategy used.

The importance of waiting for further confirmation before taking a trade is emphasized to avoid false signals.

The presenter concludes by advising to base trades on the source of invalidation and to look for structure changes.

Transcripts

in this video I'll be covering cvd

divergences explaining them and how I

use it within a real trade scenario and

some further Advanced context tips to

begin with I only really look at CBD in

the line format in this with an EXO

charts or any other platform I'm using

here are my settings for that if we just

go over to the little Cog wheel here on

the top left you'll see you've got cvd

type visible Range High histogram

opacity all of this stuff if you want to

copy that do bear in mind I'm a very

visual Trader in the aspect of not

focusing too much on Direct figures but

more visual cues in order to spot a

trade or trigger which causes me to

actually enter to simplify CBD it will

show you at any given point in the chart

how aggressive the buying or selling is

in relation to price in this example you

can see we've got this much aggressive

buying going on at this high and this

much aggressive buying going on at this

High when discussing Divergence in this

case is when referring to absorption

that is personally my only preferred use

case for cvd of as a whole however

although I do acknowledge there is other

ways to look at cvd I'm just telling you

the way in which I love I I find it most

useful and actually actionable within my

day-to-day trades absorption is where we

see orders being eaten up by larger

players showing the larger Place

potential hand thus giving us as Traders

a somewhat potential Edge should we be

able to read this data correctly and

within Market context as well we'll be

using two variables to decipher whether

this is absorption or not cvd line and

price if we see price making lower highs

while CBD is making high highs in the

same location that then shows us that

there's more buying going on within the

lower high yep price still wasn't able

to breach the prior high that was made

on the chart this is a bearish scenario

so you can see here in this case you've

got a high you've got a lower high

you've got a high on the CBD you've got

a higher high on a CBD price isn't able

to breach this higher whilst making a

higher high on the CBD thus potential

bearish CBD Divergence is forming

potential I know probably thinking that

you've seen this all before but however

I'm really going to go into detail now

actually how exactly I use this due to

the obvious nature of there being

leading seed and emergencies and acting

upon this in real time stuff and how I'd

use it to actually execute upon a trade

leading cvd is where you may have

believed there to be CBD divergences in

real time however the Associates quickly

get canceled out due to the nature of it

being leading it would be the same in

this fashion as for example here you've

got the high the higher high obviously

there's a bigger breakdown from it but

imagine in real time you're seeing this

and it just continues you think there's

bearish DVD because what you're seeing

in real time it's not a lagging

indicator and it just continues to Trend

and Trend and Trend and all of a sudden

you don't want you short here and you're

stopped out due to the nature of this

just tending to be leading CBD so how

can you kind of confront and get around

that to counteract this we've come over

to trading view now just to break this

down for you this is the top part here

is your price this bottom line here is

your cvd so essentially what you're

going to be referring to is the

potential bearish CV divergences between

these highs here right and these highs

here because obviously price and CBD

generally should follow each other high

high high high high high high

higher high on the CBD lower high in

price so how can we then be confirming

that basically this will be breaking

down and that we should be looking for

shorts you want to be looking for a

structure change now obviously this is

very kind of of obvious however you want

to be sourcing a lot of your trades from

your invalidation where are you wrong

thus then giving you an entry it should

be your thought process behind taking

most of your trades in my opinion on

this idea for example now if you're able

to enter a short trade now for example

are you confident in placing your

invalidation above that overall height I

would say no because for me there's not

been any structure change this could

still be leading cvd and price continues

to head up from here not invalidating by

changing any sort of structure now what

would be better is if we did this if

price was now to essentially break down

okay clear up potentially a few lows

validate that this CBD bearish CBD

absorption have been playing out chain

structure would be great you can even

break one lower high low two high lows

whichever one you prefer really and then

up on that second that retrace now

whether that be internal liquidity or

whatnot that is then where you're

getting into a trade with your

invalidation firmly Above This high with

the idea that you're going to be trading

with the bigger players who absorbed

price at these levels Okay so I'm just

watching the recording back now and I

kind of brushed over this point too

quickly in my opinion what I mean by

looking for internal liquidity is is

that you've seen that structure change

after some bearish see we did the highs

here for example so you've seen the

structure change of this low being

broken right and then you want to be

looking for shorts off of the internal

liquidity internal meaning from this

high down to that local load made I

wouldn't be too aggressive in shorting

like a two three six to be honest I'm

more you know waiting for a three two

slash like for example these internal

highs to be taken right before then a

heart you know lower high point for a

larger drop alternatively you could be

looking at anchored v-waps from taken

from the high and also like taking fixed

range pools of this higher to low once

you've done that you've got good

internal levels to be trading off of to

then be looking for something with lower

high to be made and looking for lower

the point is is that your invalidation

is still set in stone wherever you enter

based upon internal liquidity high

volume nodes anchored video app whatever

it may be the overall idea is that you

don't want to see this High taken out so

yeah sorry for the brush over on that

one a few other notes to point out from

this video is time frames I'm using this

primarily on the three minute five

minute one minute 15 minute I'm never

really going above the 15 minute to be

looking at CV divergences and in

relation to that I've actually only

really spoken about bearish divergences

in this example so let's quickly cover

what the bullish wood version would look

like so the bullish see really

Divergence is essentially rather than

looking at the highs for the bearish

looking between lower highs we made and

see we need to make in higher highs for

bullish you're looking at lows so I

always remember this bullish Lowe's

bearish highs in this case you want to

be seeing higher lows made on the the CV

on the price story so high lows on the

price and cvd be making a lower load why

is that well it's price if CBD is making

lower lows there's more selling

Happening Here than there is happening

here so more selling Happening Here on

the right than there is on the left and

thus price still isn't moving down that

is more bullish CBD now although I've

just mentioned all of that I still again

want to see those structure changes so

like let's say price is trending down

okay and then you see you know bullish

CBD happening here but there's no real

structure change well I would still be

cautious because you could I've seen it

happen too many times I've fallen Fallen

to this a lot of times in my previous

you know failures essentially I don't

mind missing a trade you know I'm more

confident waiting for this High to be

taken change your structure that's not

going to be much clearer and more

powerful invalidation to be placing my

trade-off of okay how confident are you

that the way you're placing your

validation will hold and will be valid

you know after a structure change it's

much more likely to do so so that's why

I'd be recommend it in that case a game

but yeah I'm really trading it with that

structure change and then again looking

for those same kind of internal

liquidity internal fibs internal fixed

range pools internal anchored View apps

now I'm going to dive into a few more

advanced kind of tips as well as like a

little actual trade I took on my account

and I can kind of talk you through it in

a bit more detail and actually how I'm

thinking during the time of this okay so

let's get into it because I think this

is a perfect example of this going on so

what happened is this is your high

initial high in the chart you then got

this High uh you're making lower high so

high low high low high but now on this

kind of Composite High here you're

making this uh essentially look at this

High massive bearish CBD supposedly but

again at this moment in time I'm still

actually thinking it's going to still

push the upside one thing to note which

I'm going to come back to in a minute is

like what is that bearish DVD present

with what does it consist of and I'm

going to come back to that in a moment

so just think about that you obviously

don't see the braking structure so you

should break up these two lows price

breaks down you're thinking maybe it's a

bit late for it to play out but no

remember this is your primary validation

this is what you're comparing that

bearish CBD against High lower highs in

the CBD initial High being you know

taking that would be on validation and

again a strong invalidation point as to

where this you know would not be going

any higher if you reclaim this level you

then see the breakdown and again this

next rally is where you want to be

looking ideally to be shorting okay and

again this is what I'm kind of referring

to internal liquidity okay internal

liquidity where you can then see if this

is this is the exact moment here okay so

you've then seen this this is the high

bearish CBD bearish CBD price again so

this is your

internal stuff now between this High

here

and this lower at the low here so this

is all your internal stuff so you just

put on this internal stuff um okay and

what happens is price simply comes up

not simply but it comes up takes sweeps

internal liquidity okay with your

invalidation being the swing high and

this was the trade I took okay I

actually had a bit of a different

invalidation on this one but this is

where a very strong evaluation came into

play I had this trade here but this

would be your overall validation in my

opinion on the idea and again it took a

while to play out but again uh at this

stage it was very very nice it took a

while to play out but back to what I was

discussing in terms of what does the cvd

consist of now what I mean by that is

when CBD obviously is a is it can be

basically discussed in terms of open

interest So within that cvd what's the

open interest doing so within this

segment here of the berry cvd what's the

open interesting you can do some

multiple ways just checking oi obviously

like open is just increasing CBD

increasing that then gives you a format

as to okay these actually new Longs

opening up here new Longs opening so

this kind of moved down actually could

be even stronger than anticipated and

actually in a lot of scenarios when you

see that that's sometimes the moment you

actually might want to jump in early

into a CBD trade so just keep that in

mind okay it doesn't always necessarily

uh have to be on like some sort of

retest especially when you know what

type of you know what's consistent

within that bearish or bearish or

bullish cvd you know do you have trap

lungs do you have trapped shorts because

sometimes you might want to jump in

quicker but again the source of The

invalidation Remains the Same okay so

just keep that in mind and yeah I hope

this Philly this makes a lot of sense so

to conclude be sure to look at what is

consistent within the open interest are

there trap Traders you know causing this

bearish or bullish cvd remember to trade

base a lot of your trades off of the

source of their invalidation okay and

you know German limiters will look for

structure changes before anticipating

CBD to play out because otherwise you

might get into the Trap of believing

it's bearish or bullish DVD for it just

turn out to be leading so you know

sometimes you want to make work for wait

for further confirmation before taking

the trade you know so check me out on

Twitter for my intraday updates and also

my templates And workspaces in regards

to EXO charts and I hope you enjoyed