Absorption on the Footprint Chart

 In ATAS the trading platform, Order Flow Trading, Volume Trading

What is absorption?

No matter in which market you trade – whether forex, futures or in the stock market – you are confronted daily with the absorption of the smaller market participants in the markets. Today we show you a simple example with the Footprint BidxAsk Volume Chart from ATAS. We will show you what such an absorption looks like.

Absorption is a scenario in which a disproportionately high trading volume occurs near the high or low of the candlestick without the price moving significantly beyond that level.

An ideal variant is the appearance of a large volume pattern at the price levels of support and resistors.

A “positive” absorption occurs when the market is sold “aggressively” and “passive” limit purchases can stop and rotate the downward movement.

A “negative” absorption occurs when the market is purchased “aggressively”and  “passive” limit sales can stop and rotate the upward movement.

The role of “passive” buyers or sellers is mainly played by large professional traders, or institutional actors who possess significant financial resources. This allows them to place large limit orders in the market at certain price levels that are of interest to them or which they intend to protect. Visually speaking, they “sit” at these price levels and provide themselves with absorbed “aggressive” market orders from often less professional and profitable market participants.

Absorption on the S&P 500

If “aggressive” buyers or sellers can’t overcome the price level, then the market bounces off due to the fact of the limit orders. As a result, they rush to close their losing positions or are driven into the stop loss and buyers become sellers or sellers. Let’s look at two simple examples:

absorption s&p 500 atas

5-minute chart in the E-mini S&P 500 Future (Ticker ES). Footprint BidxAsk Volume Cluster – Profile with Cumulative Delta and Cluster Statistic at the bottom of the screenshot.

 

The picture above shows you how fast the price drops to the bottom third and comes to a halt at the lower end of the trading range.   This candlestick is easily different if you think of it as a “b-pattern”. In addition, it should be noted that the color of the clusters in the lower third of the candlesticks is colored in dark red, suggesting that the market dominance is based on “aggressive” sales.

The volume shows in the lower third – especially in the lower wicket – that despite this fact, the price movement of “aggressive” sales down was stopped by “passive” limit orders. This results in an absorption of all “aggressive” sellers, which entails an upward movement.

p-Pattern

4 candles later – arrived at the upper range – you can recognize the same phenomenon, only vice versa; there a “p-pattern” was formed and limit-sell orders stopped the “aggressive” market buyers. It is very likely that these are the same market participants who have just stopped the downward movement. It is therefore quickly apparent who pays into the market and who makes profits.

The analytical ATAS platform allows traders to observe the market situation at the micro level. The easiest way to identify the absorption zones is to pay more attention to the volume than to the colors of the clusters.

The most important thing is that you draw attention to the appearance of the absorption pattern  and whether the movement of the price has been stopped or not. If the price holds, then a recovery should follow.

If the price level of market orders has been broken, it is obvious that the price will continue its movement. It is then very likely that the former support will become a resistance.

In this situation, the major players are beginning to protect their ‘territory’ and are using these price levels to increase their positions.

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