Case Study: A Losing Absorption Trade and the Lessons Learned
The Black Book of Day Trading Strategies
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Setup Description
In this case study, we will walk through a real-world example of a losing absorption trade. This trade was taken on a 1-minute chart in the Nasdaq 100 E-mini (NQ), and it resulted in a loss of 20 points.
The setup for this trade was a potential absorption setup at a key resistance level. The NQ had been in an uptrend for most of the day, but it was starting to show signs of slowing down. As the price approached the resistance level, we saw a surge in volume on the footprint chart. However, the absorption was not as clean as we would have liked. There was a lot of two-way trading, and the price was not able to break through the resistance level.
We also did not see a clear bearish divergence between price and cumulative delta. The price was making a new high, but the cumulative delta was also making a new high. This was a sign that the buying pressure was still strong, and that the sellers were not yet in control.
Entry Rules
- Identified a key resistance level at 12000.
- Waited for the price to approach the level and saw a surge in volume on the footprint chart.
- Did not see a clear bearish divergence between price and cumulative delta.
- Entered a short trade at 11998, with a stop loss at 12018.
Exit Rules
- The trade was stopped out for a loss of 20 points.
Profit Target Placement
- Did not have a chance to set a profit target.
Stop Loss Placement
- Placed our stop loss at 12018, which was above the key resistance level.
Risk Control
- Risked 20 points on the trade, which was 1% of our account.
Money Management
- Used a position size of 1 contract.
Edge Definition
This trade did not have a clear statistical edge because it was not a high-probability absorption setup. The absorption was not clean, and there was no bearish divergence between price and cumulative delta. This trade serves as a good reminder that not all absorption setups are created equal. It is important to be selective and only trade the setups that have a high probability of success.