absorption distribution institutional intermediate

Absorption vs Distribution - Reading Institutional Activity

• By OrderflowHQ Team
Absorption vs Distribution - Reading Institutional Activity

Absorption and distribution are key concepts in order flow trading. They reveal when large players are accumulating or distributing positions, giving you insights into future price movements.

What is Absorption?

Absorption occurs when large orders hit the market but fail to move price:

  • Large sells absorbed: Buyers are strong, price holds
  • Large buys absorbed: Sellers are strong, price holds
  • Price doesn’t move: Despite large volume
  • Institutional activity: Big players defending level

What is Distribution?

Distribution occurs when large players are selling into strength:

  • Large sells on rallies: Institutions selling
  • Price holds up: But volume is selling
  • Weakening structure: Despite price strength
  • Potential top: Reversal coming

Identifying Absorption

Bullish Absorption

Large sells hitting but price holds:

Signs:

  • Large sell orders hitting bid
  • Price holding at support
  • Volume increasing
  • Delta positive

Meaning:

  • Strong buyers defending level
  • Institutional accumulation
  • Potential reversal up

Trading:

  • Look for bounce
  • Enter on confirmation
  • Use tight stops

Bearish Absorption

Large buys hitting but price holds:

Signs:

  • Large buy orders hitting ask
  • Price holding at resistance
  • Volume increasing
  • Delta negative

Meaning:

  • Strong sellers defending level
  • Institutional distribution
  • Potential reversal down

Trading:

  • Look for rejection
  • Enter on confirmation
  • Use tight stops

Identifying Distribution

Distribution at Tops

Large players selling into strength:

Signs:

  • Price making new highs
  • Large sells on rallies
  • Volume increasing
  • Delta negative

Meaning:

  • Institutions selling
  • Smart money exiting
  • Potential reversal

Trading:

  • Wait for reversal
  • Enter on breakdown
  • Use stops above high

Distribution at Bottoms

Large players selling into weakness:

Signs:

  • Price making new lows
  • Large sells continuing
  • Volume increasing
  • Delta negative

Meaning:

  • Institutions still selling
  • Capitulation possible
  • Wait for reversal

Trading:

  • Wait for reversal
  • Enter on confirmation
  • Use stops below low

Absorption vs Distribution Strategies

1. The Absorption Bounce Strategy

Trade bounces from absorption:

Setup:

  • Large sells hitting support
  • Price holding despite selling
  • Delta positive
  • Volume increasing

Entry:

  • Enter on bounce
  • Confirm with delta
  • Use stops below support

Exit:

  • At resistance
  • When absorption ends
  • At target levels

2. The Distribution Reversal Strategy

Trade reversals from distribution:

Setup:

  • Large sells on rallies
  • Price at resistance
  • Delta negative
  • Volume increasing

Entry:

  • Wait for reversal
  • Confirm with price action
  • Enter on breakdown

Exit:

  • At support
  • When distribution ends
  • At target levels

3. The Absorption Breakout Strategy

Trade breakouts after absorption:

Setup:

  • Absorption at support
  • Price consolidating
  • Volume building
  • Delta positive

Entry:

  • Enter on breakout
  • Confirm with volume
  • Use stops below support

Exit:

  • At next resistance
  • When momentum fades
  • At target levels

Reading Absorption and Distribution

Using Market Depth

Watch for:

  • Large orders: Sitting at price levels
  • Absorption: Orders absorbing hits
  • Distribution: Orders being hit
  • Changes: Orders appearing/disappearing

Using Time and Sales

Look for:

  • Large prints: Big volume trades
  • Direction: Buy or sell
  • Absorption: Large prints, no move
  • Distribution: Large prints, price down

Using Delta

Analyze:

  • Positive delta: More buying
  • Negative delta: More selling
  • Absorption: Delta positive, price holds
  • Distribution: Delta negative, price up

Advanced Techniques

Multi-Timeframe Analysis

Analyze absorption/distribution across timeframes:

  • Daily: Overall structure
  • Hourly: Intraday patterns
  • Minute: Entry timing

Volume Analysis

Compare volume patterns:

  • High volume: Strong absorption/distribution
  • Low volume: Weak absorption/distribution
  • Increasing volume: Building pressure
  • Decreasing volume: Pressure fading

Price Action Confirmation

Confirm with price:

  • Absorption confirmed: Price bounces
  • Distribution confirmed: Price breaks down
  • False signals: Price doesn’t confirm

Tools for Absorption/Distribution Analysis

Professional analysis requires:

  • Real-time market depth
  • Time and sales data
  • Delta calculations
  • Volume analysis

Vtrender provides comprehensive order flow tools for identifying absorption and distribution patterns.

Best Practices

  1. Confirm with multiple signals: Don’t rely on one indicator
  2. Use with price action: Confirm with price movement
  3. Watch for changes: Absorption/distribution can shift
  4. Practice regularly: Improve your recognition skills

Common Mistakes

1. Confusing Absorption with Distribution

Similar patterns, different meanings:

  • Absorption: Orders being hit but price holds
  • Distribution: Orders being hit and price falls

Solution: Watch price movement

2. Not Waiting for Confirmation

Entering too early:

  • Wait for bounce: After absorption
  • Wait for breakdown: After distribution
  • Confirm with price: Price action confirms

Solution: Be patient

3. Ignoring Context

Not considering:

  • Overall trend
  • Time of day
  • Market conditions
  • Volume levels

Solution: Always consider context

Conclusion

Absorption and distribution are powerful concepts for identifying institutional activity. By learning to recognize these patterns, you can gain insights into what large players are doing and improve your trading results.

Start using Vtrender’s professional tools to identify absorption and distribution patterns in your trading.

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