4 February, 2017

Absorption at Extreme

Rationale & Trading Techniques

Numbers Bars allow us to highlight buying and selling imbalances – the actions of ‘aggressive’ traders hitting the bid or lifting the ask price and we make trading decisions according to the presence, quantity and location of these imbalances. The actions of ‘passive’ traders with limit orders however can be as revealing. Retail traders sometimes look at the DOM with a sense of mystery and belief that identifying ‘spoofing’ and ‘iceberg’ or hidden order activity provides a key to success. In fact, the traded volume tells us everything we need to know by showing us what has happened and as importantly, what has not happened. If large volume trades at a given price but price does not continue in the same direction, it tells us that the trade at that price is being absorbed, i.e. there is a large trader who is willing to absorb any amount of buying or selling at the price level in question. That is as important, if not more so, than the presence of a buying or selling imbalance. The Absorption at Extreme and Absorption Sequence indicators help to identify absorption and highlight what is not happening.

When absorption occurs at the extreme of a price bar and the bar direction opposes the price movement that led up to the bar, there is a strong indication that high volume traders are defending a price level and can trade with sufficient volume to cause the previous move to stop and potentially reverse.

 


Examples

At 9:17:45 we have an Absorption at Extreme condition at the day’s high combined with strong negative Delta. From 09:41:01 we continue to have Absorption at Extreme as buyers try to retest the day’s high but are overcome by sufficient large selling pressure to push price back down towards the day’s open:

 

In this example we see the day’s low supported three times, each time with an Absorption at Extreme condition. After the third support at 9:01:33 price rises quickly and makes new highs for the day:

 


Absorption at Extreme Settings

Input Name Description
Lookback Period If set to a value greater than 0, Absorption at Extreme conditions will not be displayed unless the current bar’s high (or low) is greater than (or less than) or equal to the highest high (or lowest low) within the lookback period.
Volume Threshold basis Determines whether the Volume Threshold (see below) is evaluated using the volume or Delta at the price level where Absorption is occurring.
Volume Threshold Specifies the level of Volume or Delta (see above) that must be present at the price level where absorption is occurring in order for the Absorption at Extreme condition to be indicated.

 


Indicator Subgraphs

ID Subgraph Description
SG1 Bid Absorption Price The price level at which selling into the bid is being absorbed, i.e. a large buyer is supporting this price.
SG2 Bid Absorption Drawing Top Use in conjunction with SG3 to highlight the bid absorption price. Follow this link for the Sierra Chart Notes about Top and Bottom Draw Style Pairs.
SG3 Bid Absorption Drawing Bottom Use in conjunction with SG2 to highlight the bid absorption price. Follow this link for the Sierra Chart Notes about Top and Bottom Draw Style Pairs.
SG4 Ask Absorption Price The price level at which buying of the ask is being absorbed, i.e. a large seller is resisting this price.
SG5 Ask Absorption Drawing Top Use in conjunction with SG6 to highlight the ask absorption price. Follow this link for the Sierra Chart Notes about Top and Bottom Draw Style Pairs.
SG6 Bid Absorption Drawing Top Use in conjunction with SG5 to highlight the ask absorption price. Follow this link for the Sierra Chart Notes about Top and Bottom Draw Style Pairs.