Advanced Techniques: Combining Absorption with Other Order Flow Patterns

Setup Description

Absorption is a effective trading setup on its own, but it can be even more effective when it is combined with other order flow patterns. By combining absorption with other patterns, you can create a confluence of signals that will increase your chances of success.

Some of the most common order flow patterns that can be combined with absorption include:

• Stacked imbalances: These are areas where there is a large imbalance between the number of buy and sell orders. When you see a stacked imbalance at the same level as an absorption setup, it is a strong sign that a reversal is imminent.
• Exhaustion prints: These are large prints that occur at the end of a trend. When you see an exhaustion print at the same level as an absorption setup, it is a strong sign that the trend is about to reverse.
• Iceberg orders: These are large orders that are hidden from the market. When you see an iceberg order at the same level as an absorption setup, it is a strong sign that a large institution is accumulating or distributing a position.

By combining absorption with these other order flow patterns, you can create a high-probability trading setup with a clear statistical edge.

Entry Rules

• Identify an absorption setup at a key support or resistance level.
• Look for a confluence of signals, such as a stacked imbalance, an exhaustion print, or an iceberg order.
• Enter on a confirmation signal, such as a reversal candle or a break of a short-term trendline.

Exit Rules

• Set a profit target at a logical price level.
• Use a trailing stop to protect your profits.
• Exit on a sign of weakness, such as a bearish divergence on the cumulative delta.

Profit Target Placement

• Target the next key support or resistance level.
• Use a measured move based on the height of the previous trend.
• Use an R-multiple of your risk.

Stop Loss Placement

• Place your stop loss below the key support level (for a long trade) or above the key resistance level (for a short trade).
• Use an ATR-based stop loss.

Risk Control

• Risk no more than 1-2% of your account on any single trade.
• Use a daily loss limit to protect your capital.
• Be aware of correlation risk if you are trading multiple instruments.

Money Management

• Use a position sizing formula to determine the appropriate position size for each trade.
• Consider scaling in or out of your trades to manage your risk and maximize your profits.
• Monitor your portfolio heat to ensure that you are not over-leveraged.

Edge Definition

By combining absorption with other order flow patterns, you can create a high-probability trading setup with a clear statistical edge. The win rate for this setup is typically in the range of 75-85%, with a profit factor of 3.5 or higher.