Absorption of demand and supply in the footprint chart
Independent from what market you trade in, whether it is the Forex, futures or stock market, you will face absorption of minor market participants by major market participants every day. Today we will show you how this absorption looks like on a simple example of a Bid x Ask Volume Profile Footprint chart of the ATAS platform.
In this article:
- What is absorption?
- Absorption through the example of an E-mini S&P 500 futures.
What is absorption?
Absorption is a scenario which shows unproportionally high trading volumes near the bar’s high or low in absence or insignificant movement of the price behind that level.
An ideal variant is the appearance of this pattern of higher, than usually, volumes at the support and resistance levels.
Absorption of sells occurs when the aggressive market sells bump into the passive limit buys, which absorb the supply of the selling side.
Absorption of buys occurs when the aggressive market buys bump into the passive limit sells, which absorb the demand of the buying side.
The roles of passive buyers or passive sellers are usually played by major professional traders or institutional players, which possess significant financial resources. It allows them to post big limit orders in the market at those price levels, which present interest to them or which they intend to protect. Figuratively speaking, they ‘sit’ on these price levels and absorb demand or supply, created by market orders of aggressive, and often less professional, market participants.
Absorption through the example of an e-mini s&p 500 futures
If aggressive buyers or sellers fail to overcome the price level, at which their absorption took place, then the market bounces from the absorption area due to the fact that ‘aggressors’ are in a hurry to close their loss-making positions. Let’s consider two simple examples.