Identifying High-Probability Absorption Setups at Key Support and Resistance

Setup Description

The location of an absorption setup is just as important as the setup itself. A high-probability absorption setup will occur at a key support or resistance level. These are levels where a large number of buyers or sellers are likely to be present, and they can provide the fuel for a effective reversal.

There are a number of ways to identify key support and resistance levels. Some of the most common methods include:

• Previous highs and lows: These are the most basic form of support and resistance, and they can be very effective.
• Pivot points: These are calculated based on the previous day's high, low, and close, and they can be used to identify potential support and resistance levels.
• Volume Profile: This is a effective tool that can be used to identify levels with a high concentration of volume. These levels are often strong support and resistance levels.

Once you have identified a key support or resistance level, you can then look for signs of absorption as the price approaches the level. This is where the footprint chart and delta analysis come in. By analyzing the order flow at these key levels, you can gain a significant edge in your trading.

Entry Rules

• Identify a key support or resistance level using one of the methods described above.
• Wait for the price to approach the level and look for a surge in volume on the footprint chart.
• Look for signs of absorption, such as a high volume of trades at a single price level with little or no price movement.
• Confirm the setup with a divergence between price and cumulative delta.
• Enter on a reversal candle or a break of a short-term trendline.

Exit Rules

• Set a profit target at a logical price level, such as a previous high or low, or a Fibonacci extension 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 the power of absorption with the location of key support and resistance levels, 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 60-70%, with a profit factor of 2.0 or higher.