ORDER FLOW: How to Trade the Absorption Setup (Trade Entry Confirmation)

Video Transcript:

Hello everyone, and in this video, I’d like to talk about order flow and one of my favorite confirmation setups in order flow. The confirmation setup is called the absorption, and I’ll show you an example of a trade I made a couple of days ago. I think this is the perfect example of how you can use the absorption setup to confirm your trade entry. So, let’s take a look at it.

First, let me start by showing you the level I wanted to trade, and then I’ll show you the absorption setup. You’re looking at the EUR/USD 30-minute chart, and I had a long level here, marked by this line. This was a long level based on a Volume Profile setup, focusing on those heavy volumes formed within this important rejection. So, this was the long level.

What happened was that the price started to go into a sudden sell-off, and there wasn’t really any strong macro news behind this. I wasn’t really sure what was going on, but there was this sudden sell-off, this spike move. Because of this, I was somewhat afraid to take that long trade blindly because it would be risky to go against such a strong sell-off, especially when I didn’t really know what caused it. I think it was just market manipulation, but I wasn’t sure, and I was afraid to take that long trade blindly. So, I decided I would take it, but only if I saw confirmation on order flow.

What I did was open the order flow chart and waited for the price to come to this zone. I wanted to see a strong confirmation to enter that long trade from here. Now, let me switch from this 30-minute price action chart to a 5-minute order flow chart.

This is a 5-minute order flow chart, and here is that selling activity—how the price was dropping toward that level. This blue line represents the level, right? As the price was dropping, I was waiting for a confirmation. One of my favorite confirmations is the absorption, and this is exactly what happened here, right at the level.

This was the only confirmation I needed to enter that long trade from here and not be afraid of that sell-off that came before it. Now, let me talk a bit about the absorption. Absorption is essentially when you see huge orders on bid and ask; these need to be unusually large orders. For example, if you look here in this zone, when the price was dropping, and you compare the volumes on bid and ask, you can see that the volumes in this heavy volume node are unusually heavy compared to, say, the average volumes here, right? Unusually heavy volumes here, but these unusually heavy volumes need to be present on both bid and ask—in other words, on both sides of the footprint.

Now, what do these heavy volumes on bid and ask tell us? Because there was this strong sell-off, the heavy volumes on bid are showing sellers trying to push through. On the other hand, we have heavy volumes on ask, and those are showing buyers. This is important: these buyers are buying everything the sellers have to sell and are absorbing the selling pressure. So, even though the sellers are trying to push the price downward, selling and selling, the price doesn’t move because the buyers are buying, buying, and buying. Eventually, the sellers get exhausted, the buyers take control, and they push the price upwards. This is the absorption, and it needs to happen somewhere around a strong support or resistance zone, like in this case. Here, it happened exactly at our level, but if it were, for example, somewhere else on the chart, it would still be a confirmation for me to enter a long trade.

Now, if this happens randomly somewhere on the chart—if you see huge volumes on bid and ask somewhere—it doesn’t really mean anything. It is only important if you see it around strong support or resistance levels.

Let me move the chart a bit so you can see the reaction here. That was the absorption that told me it was safe to enter a long trade because the selling pressure was absorbed by strong buyers who were buying everything the sellers had to sell. Eventually, the buyers won and pushed the price upwards.

So, that’s the absorption setup. Obviously, this is not the only confirmation setup you can use with order flow. If you’re interested in learning more about this, you can visit my website, trader-dale.com. If you click on “Quick Trading Course and Tools” it will take you to a page where you can browse my trading courses and custom-made indicators. If you scroll down a bit, you’ll find the Order Flow Pack, which will teach you everything about day trading with order flow and provide you with my custom-made order flow and Volume Profile indicators.

Alright, that’s all for now. I hope you guys liked the video, and I look forward to seeing you next time. Until then, happy trading!

Joy

September 27, 2024 at 11:20

Thank you for explaining the absorption setup so clearly. As a fellow EUR/USD trader, I know how challenging it can be to decide on a long position after a quick sell-off. It’s always a bit tricky trying to figure out if it’s genuine market movement or something else at play. I’ll definitely start watching for absorption at key levels more closely. Appreciate your insights!

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