Delta in the market or commonly known as the delta profile is a proficient order flow tool that takes volume profiles to the next stage, the next level. An evolution if you will. Delta allows traders to see the current market imbalances at certain levels in the market that can provide reversals or strength in move continuity.
Not to mention that strong key delta regions are to be reused as time passes by, where large market participants create large swings from a certain level.
Delta is defined as the ask volume minus the bid volume at a level. In other words, market buyers at a certain level minus the market sellers at that same level.
Delta creates an imbalance at each level (usually). If we focus on the S&P500 futures ES E-mini, then large imbalances of delta are generally 800 and higher.
When we watch delta profile prints as traders, we get a lot of important information from these regions.
Where are there strong traders to support the current move? Where are there traders that are getting trapped? Where are stops hidden to get triggered?
All of this allows us to create a trading strategy around delta.
The basics of Delta Profiles
What are Delta Profiles? They are volume profiles that are not only split between market buyers and sellers but the difference is highlighted as a single denomination.
Meaning a volume profile created by delta imbalances.
Delta profiles are generally looked at from a cumulative perspective and a session-by-session perspective.
Cumulative delta profiles:
Cumulative delta profiles are multiple sessions of delta that are added together. Similar to a cumulative volume profile.
You can see where strong imbalances of buyers or sellers rest at key levels.
Some cumulative delta profiles to use: weekly, monthly.
The image below splits the profiles on a day-by-day basis, meaning it combines the current day session and the overnight session. This is a visual representation of Delta. Where the blue blocks suggest market buy imbalances or larger positive delta. The red areas represent the market sellers.
Behind the profile, you can see the volume profile and how the delta compares to the volume profile. Who is imbalanced where.
Dividing delta profiles by session, regular trading hours (New York session), and extended trading hours (Globex or overnight session) allows traders to see where the imbalances are on the current session, a powerful tool for day traders.
Below you can see the image of the split profiles, the current day session and the current overnight session, from left to right respectively.
Here not only do you have a visual (blue and red) on the delta, but you have the imbalance numbers that are written out. For comparison, you can see the volume profile as well that compares to the delta.
You’ll notice there are fairly large cumulative numbers spread on the profile, with a lot of those clustered numbers that are positive at the top of the session.
Advantages of utilizing delta profile
Market Delta profiles allow traders to identify the general market sentiment around key levels.
We’ve established that large market delta is important. Using the S&P500 ES E-mini futures. We want to focus on delta that is 800 and higher. Either positive or negative.
Large Positive Delta:
This suggests that there are larger buyers coming in at market than sellers at that level.
If the price is above the level, those buyers are strong and they would want to hold prices out for the continued leg higher.
If the price is under the level, that suggests that the price is actually overbought and the buyers buying tops are stuck longs. These longs are getting trapped at the tops and are most likely weak-handed buyers that would reverse prices lower.
In the image below, these traders are getting trapped at highs, causing the expected market reversal lower.
Large Negative Delta:
Negative delta, whether its 800 or 2000, has a similar play out to that of large positive delta. Naturally if you have very large delta it is more of a figure area than smaller delta. A 3000 negative delta area would tell you there’s more decision than a level that is negative 800.
If prices are under the large negative delta, the sellers are holding our strength and would want to push prices lower.
If sellers are under the price, and there are large negative deltas sitting into lows, these sellers are getting trapped and prices would want to reverse to the upside.
All in all the context of where price is in relation to the delta is what is important, this tells us if traders are trapped or they’re real.
Reading and using Delta
Delta is most effective when understanding large market positioning and where the positioning lies. Delta can help us identify key levels in the market by understanding what it means for price to be above or below certain delta levels.
Delta can also be clustered. This means that there could be positive and negative deltas or just of one kind congested at a spread out region.
For example, if we have an area spread out of large deltas this becomes a key support resistance. In this case (image below) we have a lot of positive delta at the 4400-4402 area which failed to break above several times, this suggests that these buyers are getting trapped into the high and a reversal is in order.
Ideally, you have one concrete region of delta clusters meaning, buyers or sellers, rather than a mix. A mix is more convoluted and the probability of anything happening increases. As long as the sell deltas are away from the cluster of positive delta in this case suggests there is solid potential for a reversal.
Traders can use delta as a confirmation for their strategy, when and where to get into the move.
Fading, counter trend moves
Finding counter-trend rejections is easier done when you have delta on your side. Traders would want to focus on the example above where traders actually get trapped, and cannot continue their move for the reversal.
From a delta perspective, buyers accumulating at the tops with large positive delta clusters. Would need a trigger to identify the sellers like depth of market or a footprint.
Seller’s accumulative large negative delta at lows allows you to find massive sellers getting trapped, but they’re not fully trapped unless someone turns on the buy.
You can also identify if large buyers on delta are coming in at bottoms and sellers at tops to suggest the turning point.
In the example below, you can see the sellers that keep accumulating large negative delta into lows, without follow through, results in a move higher. 30+ points on the ES E-mini futures or $1,500 a contract.
Pullbacks, trend moves
Pullbacks are trend-following moves. Generally, we follow the structural perspective of:
Bulls, higher highs and higher lows, the break and retest of a top.
Bears, lower lows and lower highs, the break and retest of a low.
Or the break and retest of a level as long as the move continues in the direction of the trend based on the expected low and high theory.
Let’s take a look at the example below. From a structural perspective, we have a key zone that was broken and we’ve run up heavy.
The zone sits between 4388 and 4391. Larger area for a futures day trader on the S&P500 E-mini futures, however, this is the prior top that needs to break and to retest to continue the trend. This is then confirmed with delta, you can see how extensive the sell delta is sticking out, in the second image you will see its over 1,600 negative delta, traders getting trapped, and around we have a larger positive delta.
This is suggestive that sellers are getting trapped into those lows and some larger neg buyers are to be stepping into price. We can locate areas where the continued trend is expected and confirm with delta.
The result of the move?
Market bid from our level of strong traders.
Targets determined by delta
Traders can often determine their targets by using large deltas. It is not advisable to just blindly enter in large delta areas, however, when you see them already in a trade, you should consider targeting the area or taking some of the position off.
Those large deltas are usually key barriers to hold price out. In the direction of the trend, you can pinpoint larger deltas to get out of positions.
Stop losses determined by delta
When you are entering into positions, you can use Delta for your entries as well as your stops! If you find large clustered of positive or negative delta, you can hide your stops behind them. Assuming that the sellers that sold from that resistance or buyers that bought from the support will have a tough time getting through the level.
All in all, delta has a huge role in trading futures. You can where large sellers and buyers are active and where they’re getting trapped to find high-quality trades and limit your risk.
Delta requires studying to make sure that you understand what each delta suggests. They should not be used blindly but as a confirmation tool in trading.