Recognizing absorption at level on NAS100 M1

[LondonScalper]

Absorption is a word that gets thrown around a lot, especially by people selling order flow software. I don't have proper futures data for my NAS100 CFD trading, so I'm working with what's visible on a CFD chart. Here's what I look for and how often it's paid.

The basic idea: price reaches a level, aggressive orders keep hitting it, and price doesn't move through. Someone is quietly taking the other side.

On an M1 CFD chart, what I can actually see is something like this. Price comes down to a level, say yesterday's low or a round number. Several M1 candles in a row have long lower wicks, and they close in the upper half of their range. Tick volume on those candles is above average, sometimes well above. And despite the effort, price makes no meaningful new low, maybe 3 to 5 points below the level at most.

When I see three or more candles like that, I start looking for a long. Entry on a break of the high of the last absorption candle. Stop below the lowest wick.

I've logged 46 of these since spring, all between 14:30 and 17:00 London. 26 winners. Average winner around 1.6 times the average loser.

The caveat: tick volume on a CFD is the number of price changes, not the number of contracts. It's a proxy at best. On busy news days it's useless, because everything is above average.

So I treat it as an occasional setup, not a core one.

[Fairman]

Tick volume on those candles is above average, sometimes well above.

One thing worth keeping in mind with CFD data: tick volume counts how many times the broker's quote changed, not how many contracts traded. On a NAS100 CFD it usually tracks real activity reasonably well, but it also rises whenever quoting just gets busier, for example when the futures flicker around a level without much size changing hands. So above-average tick volume on those wicks fits absorption, but it also fits a level with lots of small quote updates. If you can get a chart of the Nasdaq futures, NQ or the micro MNQ, with real volume, even delayed, it's a good cross-check: absorption should show up there as heavy traded volume at the lows with little progress. Checking a month of signals against the futures volume would show whether the tick volume part of the rule is doing any work.

[Shadow Trader]

Fairman's futures cross check is the filter I added after my first twenty CFD only signals. Tick volume on a NAS100 CFD rises whenever quotes flicker, so I now want to see the same low defended on NQ or MNQ with real volume before I trust the absorption story.

Three wick minimum is still my hard floor on the CFD tape. Two long lower wicks can be noise, while three or more closes in the upper half with no meaningful new low is the shape I will actually trade.

Entry stays the break of the last absorption candle high, stop under the lowest wick. I keep it off the core card because news days make tick volume useless and the sample thins quickly once those days are removed.

The chart attached sketches price leaning on a level with repeated long lower wicks, no new low of consequence, then a break of the absorption candle high for the long. That is the only version I take.

img_13123_r1.png (52.54 KiB) Viewed 28 times

Do you require the futures confirmation every time, or only when the CFD tick volume looks borderline relative to the recent average? I lean toward every time on news adjacent sessions.

[Shadow Trader]

LondonScalper, your numbers already make a decent case. 26 winners from 46 is about 57 percent, and with winners at 1.6 times losers that works out near 0.47R a trade before costs, which is plenty for an occasional setup.

One practical snag with Fairman's futures check is the level itself. Many NAS100 CFDs quote the cash index, derived from NQ less a fair value adjustment, so yesterday's low on the CFD can sit a different number of points from the futures low, and that gap drifts towards the roll.

I map the level using the CFD minus futures difference at the moment of the test, not the one from the morning. On my feed that difference moved about 8 points across one session, which is more than the 3 to 5 point overshoot you allow.

I would also split your 46 by half hour. My guess is that the first 30 minutes after the 14:30 cash open behave differently, because the wicks there are often just the opening auction finding its feet.

How wide is the stop under the lowest wick on a typical one? If it runs past 25 points, the spread around the cash open starts to matter.