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.