Absorption In The Order Flow On Moves Up How To See It In The Delta And Imbalances

Summary

In this video, Mike from Order Flows explains how to use delta in order flow analysis to recognize absorption in the market. He covers how aggressive buying during rallies and selling during pullbacks can signal market strength or weakness. By observing negative delta bars during price moves up, traders can spot signs of absorption, where passive buyers are absorbing selling pressure. Mike emphasizes the importance of analyzing delta imbalances and footprint charts to detect strong support or resistance levels, offering valuable insights into market behavior and price action. This video is a guide for traders looking to refine their market analysis skills.

Takeaways

• 😀 Delta is a key indicator for understanding market absorption, showing whether buying or selling is dominating the market.
• 😀 In a market rally, positive delta is expected, with aggressive buyers lifting the offers, but negative delta bars can indicate absorption if there are strong passive buyers.
• 😀 Absorption is the process where passive buyers or sellers absorb aggressive selling or buying, which helps to support a market trend.
• 😀 Signs of absorption include negative delta bars on upward movements, indicating that selling is being absorbed by buyers.
• 😀 Strong support is identified when you see significant bid volume, indicating that buyers are actively trying to hold the market up.
• 😀 Execution algorithms (algos) are designed to minimize market impact by managing bids and offers carefully, allowing them to absorb the market without disrupting it.
• 😀 To spot absorption, look for strong volume on the bid side, even in the presence of negative delta on a green candle, signaling that support is being formed.
• 😀 A drop in price followed by a rally back up to a certain level can indicate that buyers are working to absorb selling and push the market higher.
• 😀 Market movement with small negative deltas on green bars may suggest a balance between buyers and sellers, with absorption taking place without dramatic price movement.
• 😀 Recognizing absorption early on helps to understand whether the market is truly strong and if support is likely to hold during retracements.

Q & A

What does the term 'delta' refer to in the context of this video?

In this video, 'delta' refers to the difference between the number of contracts traded on the bid side versus the offer side. A positive delta indicates aggressive buying (lifting the offers), while a negative delta indicates aggressive selling (hitting the bids).

What is meant by 'absorption' in market order flow?

Absorption refers to the process where aggressive selling is met with strong passive buying, or vice versa. It suggests that the market is being supported by buyers during a rally or resisted by sellers during a pullback, preventing a reversal.

How can absorption be identified in the order flow?

Absorption can be identified by looking for negative delta bars during a rally. This indicates that although selling pressure is present, it is being absorbed by buyers, which is a sign of market strength.

What does a negative delta during a rally indicate?

A negative delta during a rally suggests that there is aggressive selling occurring, but it is being absorbed by passive buyers who are providing support to the market, preventing it from declining.

Why is it important to look deeper into delta values in the order flow?

It’s important to look deeper into delta values because a green bar with negative delta could indicate absorption, where selling pressure is being absorbed by buyers, which adds strength to the market's move up.

What is the significance of strong volume on the bid side in the order flow?

Strong volume on the bid side indicates that there is passive buying support. It means that buyers are willing to absorb the selling and prevent the market from declining further, creating a potential support zone.

How can one differentiate between aggressive buyers and passive buyers in the order flow?

Aggressive buyers are those who lift the offers (buy at market), while passive buyers place bids at specific price levels, absorbing the selling pressure without pushing the price immediately higher.

What role do execution algorithms play in market behavior?

Execution algorithms help traders place large orders in the market without causing significant price movements. They monitor the bid and offer prices to place orders strategically, absorbing buying or selling pressure as needed.

How can delta imbalances be used to recognize absorption?

Delta imbalances can indicate absorption when you see small negative deltas during a rally or small positive deltas during a sell-off. This suggests that the market is balancing out, with strong passive buyers or sellers absorbing the counteracting pressure.

Why is it helpful to track the delta during both up and down moves?

Tracking delta during both up and down moves helps to identify whether the market is being supported or resisted. A rally with negative delta indicates absorption, while a sell-off with positive delta might signal that buyers are stepping in.