Cluster Data Analysis: How to Identify Hidden Market Trends

There are various methodologies, technical indicators, and tools available for analyzing currency, stock, and other financial markets. Some traders successfully rely solely on empty charts to forecast, basing their analysis on candlestick and bar formations. This method allows for evaluating both the overall market trend and individual data for each candle: opening and closing prices, highest and lowest quotes during the period, as well as the general direction of movement. When observing the development of events as a bar forms, we can roughly estimate how significant the price fluctuations were and in which direction they occurred. However, when looking at the completed candle, we lack complete information.

This is where cluster analysis can come to the trader’s aid. It is a type of graphical representation of a candle that makes it clear at what moment and what volume of an asset was bought or sold. Such data can be very useful for identifying market regularities, assessing and forecasting the further direction of the trend, its structure, and its strength. Let’s delve into it further.

What is Cluster Analysis and How Does it Work?

Cluster data analysis in financial markets emerged relatively recently. Just 20 years ago, data on trades made within a bar were inaccessible to private speculators and investors, so they were not used in trading. Once this information became available, various software applications were actively developed to visually display transaction volumes for buying and selling on charts, enhancing traders’ analytical capabilities. Many began to successfully apply it in trading.

In fact, cluster data analysis allowed participants to look inside the candle and visually, in numbers, see what comprised the familiar final trading volume and how bulls and bears participated in it: how many shares or currency pairs were bought at what prices, and where they were actively sold. Such detailed information helps to better understand the market and traders’ reactions to various events, as well as when strong price levels are reached.

How is the price reflected on the chart? It’s an agreement between buyers and sellers of an asset that was executed at a specific rate. When this happens and the transaction volume is large enough, we see the price move in one direction or another. A cluster is a type of price candle that shows not only price levels but also the volume of transactions executed at those levels.

Depending on the cluster analysis program variant, we can see the following data on the chart:

• Standard candle information: opening price, closing price, minimum and maximum for the period.
• The total volume of the candle, traditionally seen at the bottom of the MetaTrader terminal charts.
• The volume of positions opened at a specific price within the bar.
• The volume traded at Ask and Bid prices.
• Delta, or the difference between volumes at Ask and Bid prices.
• Graphical representation of trading volume for each quote received within the bar.

How to Apply Clusters for Market Analysis

Let’s look inside the cluster. Here we find data on the price and volume of trades for the selected instrument at a specific point in time. The difference between the number of contracts for buying and selling (delta) at a specific quote is displayed inside the cluster.

If you’ve been watching the chart for at least five minutes, you know that the price moves continuously. Therefore, there are usually several clusters within one bar, allowing for a more detailed assessment of the market’s reaction in the form of trading volumes at different price levels. How can we apply this in trading?

This information shows who currently dominates the market – sellers or buyers: if the aggregate delta is negative, then there are more bulls, if positive, then more bears. Understanding this, one can make a short-term forecast of where the price will go in the near future.

Cluster analysis indicators can also be very useful for assessing the trend phase. Knowing that the delta value goes beyond the normal range, reaching critical marks (usually highlighted on the chart in bright colors), one can find a good entry point when a trend reversal is approaching. It’s important that the signal about large volumes obtained is in the opposite direction to the current trend.

If you pay attention to the accumulation of large volumes at certain levels during consolidation, you can use them as strong supports and resistances. If traders react to them in this way once, it means they trust these marks, and in the future, the price will continue to bounce off them. Even better if you already see confirmation of this in the price history.

Based on cluster analysis data, a simple trading strategy can be created.

Once we’ve identified a level with a large volume of trades in the flat range, the so-called Point of Control (POC), it’s important to mark it as a horizontal line. When the consolidation period ends, the market is likely to return to this level with a high probability and bounce off it. Therefore, you can place a pending order at this level or enter the market when it touches. Protective orders are set according to general risk management principles.

Note that if the price returns to a strong level and the expected reaction we anticipated doesn’t occur, and the price easily surpasses this point without a rebound and reversal, then most likely there was a false volume spike in the market at that moment to trigger stop orders.

What is POC or Point of Control

Point of Control (POC) is the level where the market is in balance, showing maximum position volumes. In the image below, you can see the volume profile, which depicts a good period of the market with a balance area, where 70% of the total volume of trades was concluded, with its upper and lower boundaries and the POC point (the longest bar).

It is used to determine strong support and resistance levels.

Benefits of Using Cluster Analysis in Trading

What other benefits can such a chart assessment provide, apart from a broader view and understanding of the market?

Portfolio diversification. By finding assets with similar characteristics through cluster analysis evaluation, a more balanced investment portfolio can be created, including assets with different market behavior at different times.
This point will continue the previous one. These data can provide an insight into hidden correlations between exchange instruments and assist in risk management and hedging strategy development.
By using cluster analysis to evaluate historical quotes, traders can develop more effective trading strategies based on discovered trends and patterns. In simpler terms, you can find your own patterns for the selected asset and use them in trading.
By grouping assets according to criteria not standard for traditional methods, you can find non-obvious trading opportunities and undervalued assets where cluster analysis will be particularly effective.
By observing the dynamics of trading volumes and understanding the principles of grouping, you can better assess and manage risks associated with various types of assets.
Cluster analysis is easily adaptable to different market conditions and can be integrated into existing trading systems as an auxiliary or primary tool.

Where to Find a Chart for Cluster Analysis?

This market forecasting method is not the most common among traders, so you won’t find it in the basic indicators of traditional MetaTrader 4 and MetaTrader 5 platforms. However, there are useful custom filters capable of building a cluster chart on these platforms. The most popular of them are YuClusters and footprint. Their full functionality is paid.

Among the available options without payment, you can use a cluster chart on the ClusterDelta platform with a 20-minute delay, as well as on Ninja Trader. Indicators for the latter are available with a free demo version. For the same purpose, you can install trading programs like ATAS and Volfix.

By using this software and indicators in conjunction with traditional trading strategies, you can more thoroughly understand how quotes are constructed and strong levels of your asset appear.

Conclusion

Cluster data analysis is a modern method for evaluating trading volumes within a single candle timeframe. Typically, within such a bar, there are multiple clusters that intricately display the activity of bulls and bears, as well as the volumes of transactions they executed for buying and selling at specific levels.

Having access to such information allows for observing trend phases and identifying strong markers that form robust support and resistance on the chart. This represents a highly detailed analysis that significantly expands the trader’s understanding of the situation in the market for the selected asset.