In financial markets, price, open interest (OI), and cumulative volume delta (CVD) are key indicators for measuring market sentiment and trends. Understanding the relationship between these three elements helps investors better grasp market movements and make more informed trading decisions. This article aims to explore the connection between price fluctuations, open interest, and CVD. By analyzing the interplay of these data points, we aim to uncover shifts in market liquidity and the balance between supply and demand, providing valuable insights for investors.
Basic terminology
Open Interest(OI)
Open interest refers to the total number of outstanding derivative contracts that have not been settled. In simple terms, it represents all positions that traders have not yet closed in the derivatives market.
Cumulative Volume Delta(CVD)
Cumulative Volume Delta (CVD) is a volume-based trading indicator that provides a visual representation of market buying and selling pressure by calculating the differences in trading volumes between buyers and sellers. It is an extension and improvement of the Volume Delta indicator, offering traders better insights for decision-making in the market.
How do you judge the market by indicators?
Generally:
Price up+OI up = long position opened
Price up+OI down = short position closed
Price down+OI up = short position opened
Price down+OI down = long position closed
Of course, this conclusion is not rigorous, so we need to ensure the accuracy of the analysis through some other indicators.
Adding the CVD indicator to the chart, let's revisit the previous hypothesis: Price up + OI up=long position opening. Based on this assumption, we have drawn a preliminary conclusion that market participants are significantly opening long positions, driving a simultaneous increase in both price and open interest. However, this initial judgment requires further validation and support. Therefore, we will now use the performance of CVD (Cumulative Volume Delta) to assist in this verification. The continuous rise in CVD indicates that buying pressure is dominant, with market participants actively purchasing assets, leading to a cumulative increase in trading volume. This phenomenon aligns with our hypothesis about long position openings and further confirms that bullish sentiment is strengthening in the market, as traders are indeed increasing their long positions, driving the upward trend.
Next, we will introduce a scenario of closing long positions.
Let’s revisit the previous hypothesis: Price down + OI down = closing long positions. Based on this assumption, we have drawn a preliminary conclusion that market participants are closing their long positions, leading to a simultaneous decrease in both price and open interest. Next, we will use the performance of CVD (Cumulative Volume Delta) to assist in this verification. A decline in CVD indicates that selling pressure is dominant, with market participants actively selling assets, resulting in a cumulative decrease in trading volume. This phenomenon aligns with our hypothesis about closing long positions and further confirms that bulls are indeed liquidating their positions, contributing to the market's downward trend.
Next, we will introduce scenarios of opening and closing short positions.
Let’s revisit the previous hypothesis: price down + OI up = opening short positions. Based on this assumption, we have drawn a preliminary conclusion that market participants are establishing short positions, driving the price down while open interest rises. Next, we will use the performance of CVD (Cumulative Volume Delta) to assist in this verification. A decline in CVD indicates that selling pressure is dominant, with market participants actively selling assets, which leads to a cumulative decrease in trading volume. This phenomenon aligns with our hypothesis about opening short positions and further confirms that market participants are indeed establishing short positions, contributing to the downward movement of the market.
Next, we will present a scenario of closing short positions.
Let’s revisit the previous hypothesis: price up + OI down = closing short positions. Based on this assumption, we have drawn a preliminary conclusion that market participants are closing their short positions, leading to a rise in price while open interest declines. Next, we will use the performance of CVD (Cumulative Volume Delta) to assist in this verification. An increase in CVD indicates that buying pressure is dominant, with market participants actively purchasing assets, resulting in a cumulative increase in trading volume. This phenomenon aligns with our hypothesis about closing short positions and further confirms that participants in the market are indeed liquidating their short positions, contributing to the upward movement of the market.
Through an in-depth exploration of the relationships between price, open interest (OI), and cumulative volume delta (CVD), this article reveals the interplay among these three elements and the dynamic shifts in market sentiment. We can see that rising prices accompanied by simultaneous increases in OI and CVD typically indicate an influx of bullish capital into the market, as traders actively open long positions. Conversely, price declines, coupled with decreasing OI and weakening CVD, often suggest that bearish sentiment is dominating. By employing this multidimensional analytical approach, investors can better assess market trends and participant behaviors, allowing them to optimize their trading strategies and reduce risks.
