4 February, 2017

Absorption Sequence

Rationale & Trading Techniques

Volume is what causes price to move and it follows that it is the action of large traders that determines price levels during the trading day. Large traders cannot simply enter the market and buy many hundreds or thousands of contracts in a single trade. They will ‘work’ an order in order to build the intended position. The Absorption Sequence indicator helps identify this large trader activity by highlighting price levels in the current and prior price bars where buying or selling is being consistently absorbed, i.e. a price is being supported or resisted. By highlighting these market-generated support and resistance levels that represent the trading interests of large traders, we can make trading decisions based upon the bias of the stronger hands in the market and avoid falling into the traps presented by indicators that focus solely on price.

 

 


Examples

Note how in the 20 minute period from 13:21:50 to 13:40:20 we had an Absorption Sequence at 2260.75 followed by a decisive break of the resistance around 2263.50. The 13:35:45 bar provided a good signal that 2260.75 was being supported with the positive Delta at 13:40:20 providing final confirmation:

Absorption Sequence 1 - Emoji Trading Order Flow Suite

 

Here we see a battle between buyers and sellers from 10:39:15 until 10:41:18 in the 2257.50 to 2280.00 price range following a climb from the day’s low. How many technical analysis traders would have bought near the top of the 10:41 price bar, been stopped out and then frustrated as price climbed. With the insight of the price levels where there was an Absorption Sequence combined with the positive Delta, the false breakout provided an buying opportunity at 2257.50 with a tight stop 2-3 ticks lower:

 

Absorption Sequence 2 - Emoji Trading Order Flow Suite

 

 

Absorption Sequence also provides good insight for intraday trading ranges. Price does not move from A to B in a straight line. We have pullbacks and sideways trading. Depending upon the trader’s timeframe and timescale, sideways ranges can be capitalised upon. In the example below, if we were long prior to 10:49:25, we may have used 2261.75 as an exit level for part of our position and 2260.50 as a re-entry level of a longer term trade to generate another 5 ticks profit from the tide:

 

Absorption Sequence Trading Range - Emoji Trading Order Flow Suite

 


Absorption Sequence Settings

Input Name Description
Lookback Period This input determines how may bars back from the current bar will be considered when evaluating an Absorption Sequence. 

 


Indicator Subgraphs

ID Subgraph Description
SG1 Bid Absorption Sequence Price The price level at which selling into the bid is being consistently absorbed, i.e. a large buyer is supporting this price.
SG2 Bid Absorption Sequence 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 Sequence 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 Sequence Price The price level at which buying of the ask is being consistently absorbed, i.e. a large seller is resisting this price.
SG5 Ask Absorption Sequence 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 Sequence Drawing Bottom 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.