The Orderflows Absorption Course

Module 5 – Reversals vs Continuation

 Disclaimer
This presentation is for educational and informational purposes only and should not be considered a
solicitation to buy or sell a futures contract or make any other type of investment decision. Futures
trading contains substantial risk and is not for every investor. An investor could potentially lose all or
more than the initial investment. Risk capital is money that can be lost without jeopardizing ones
financial security or life style. Only risk capital should be used for trading and only those with sufficient
risk capital should consider trading. Past performance is not necessarily indicative of future results.

CFTC Rules 4.41 - Hypothetical or Simulated performance results have certain limitations, unlike an
actual performance record, simulated results do not represent actual trading. Also, since the trades have
not been executed, the results may have under-or-over compensated for the impact, if any, of certain
market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the
fact that they are designed with the benefit of hindsight. No representation is being made that any
account will or is likely to achieve profit or losses similar to those shown.
Most traders consider themselves trend followers. It is basically herd
behavior. Humans are herd animals. They are relying on price based
indicators which are based on information after the fact.

Order flow analysis uses not only price, but also volume, aggression and time
so that traders can take advantage of a move earlier than the herd.
Continuation then reversal
Why does this one fail and
The next one work?
Absorption in a trend. As a trader the most frustrating part of trading is
watching the market make a big move while you are sitting on the sidelines.
Then by the time you get into the position, you either buy the high or sell the
low. It left you wondering if there is a better way to trade.

While it’s nice to buy on pullbacks, sometimes the market just doesn’t offer
you a pullback to buy into.

You can only trade the opportunities the market gives you.
Once you determine the direction of a trend, the next step is to determine if
the trend is sustainable. How does a trader determine if a trend will continue?

You look at volume and how it is transacting.

Chart – supportive buying
Not only does volume help to identify a trend, it also helps to confirm the
trend. A trend won’t continue unless there is accompanying bid traded
support on up moves and resistant offer trading on the way down.

Heavy volume at certain price levels help define support or resistance in the
market.
Chart – absorptive buying.
Chart – absorptive selling.
When coming into resistance with strong volume and the market goes
sideways and still shows strong volume, that is a sign that the market still has
some upside capacity left. Don’t get short yet.

You would want to get short after coming into resistance with strong volume,
but once you start going sideways, volume decreasing which is a sign that
buyers are drying up or becoming exhausted.
Lesser volume
Then blow-off
When a market moves into congestion/consolidation it is hard to determine
direction. Often times buyers and sellers are evenly matched and price is
trading in a narrow range.

Sings of consolidation:
Lighter volume than average.
POC’s around the same level.
Delta – small deltas or big meaningless deltas with little to no follow through.
Fed day
Absorption & Trend Continuation – occurs after a big volume increase with a
weaker volume pullback.

When a market has been selling off and there is a bar with heavy volume
followed by a bar with very weak volume it shows that there is limited buying
and I would look for the lows to be taken out and the market to trade lower.
Volume drops off dramatically, then gets slammed again
Absorption & Trend Continuation – occurs after a big volume increase with a
weaker volume pullback.

At a high when there is heavy volume at the high and the next bar exhibits
very light volume, the sellers have not yet come to the market and watch to
see if we break out to new highs and continue the trend. This is often a sign of
profit taking or it could simply be indicative that traders are not sure if the
trend is real. If the market doesn’t revert back to the mean as most traders
would be looking for, the trend is real.
Going into congestion
Absorption often leads to sideways price action. Before it continues in a move
or turns.

When the market gets to highs or lows, watch the delta.

As the market is making new highs look for green candles with extremely
strong delta on green up candles with above average volume, followed by a
red candle with a negative delta or small positive delta.

As the market is making new lows look for red candle with extremely strong
negative delta, above average volume followed by a green candle appearing
with positive delta.
New highs, but watch delta
& volume.
Why is this and not that?
When the market reaches an area of consolidation due to absorption, it does
not mean that there will always be a reversal. The market can trade sideways
and continue its initial direction.

When the market comes into an area of absorption, one side of the market
thinks the trend will continue (aggressive traders) while the other side thinks
the market is ready to reverse (passive traders).
Sideways before selling off
Sideways – new low - sideways
Absorption can lead to sideway action where the market can turn or resume.

Remember, when absorption occurs a reversal does not always occur. It still
depends on what happens in the market.
The key part, the part that gives confirmation that the market will go sideways
is the following bar being an inside bar.
The trend is your friend. Well of course it is. But before a trend occurs it needs
to start. How does it start? It needs a push, a little bit of momentum needs to
build up. This is where is absorption comes into play. Normally you would not
think of absorption as momentum, but what is happening in the market? The
market moved in one direction, then it met either support or resistance which
then pushed it back in the opposite direction with early momentum.
This concludes module 5. In module 6, I will discuss absorption trade setups.
You will learn clear cut trade setups that you can add to your trading arsenal.

See you on the next module.