Lesson 6 – DOM Basics | Absorption, Pulling & Stacking Explained

Understanding the DOM: Absorption and P&L

What is Absorption (ABS)?

• Absorption occurs when retail traders place a significant number of buy orders at a bearish level, indicating potential price movement.

• Institutions recognize these retail buy orders and use them to fill their sell positions, leading to a situation where retail traders become trapped as prices move against them.

Identifying Levels and Using the DOM

• To effectively use absorption, one must first identify key levels on the volume profile; this helps in anticipating market movements.

• Refreshing the DOM two ticks before reaching identified levels allows for clearer visibility of buyer-seller interactions without cluttered data.

Finished vs. Unfinished Auctions

• Understanding finished auctions (FA) versus unfinished auctions (UFA) is crucial; an FA indicates completed trading activity while a UFA suggests ongoing price action that may need to be resolved.

• Price typically sweeps through unfinished auction areas before moving down or up, depending on whether it has reached a finished auction state.

Pulling and Stacking Dynamics

• When price approaches a level quickly with high buying activity, observing how many buyers get absorbed by sellers can indicate future price direction.

• A divergence between buyers and sellers at critical levels signals potential entry points for trades; specifically looking for three ticks of pulling and stacking after absorption confirms market sentiment shifts.

Practical Application of Concepts

• The interaction between bid delta and ask delta during absorption phases provides insights into market strength; increasing bid deltas alongside selling pressure indicates strong downward momentum.

• Recognizing patterns in the DOM can help traders make informed decisions about entering or exiting positions based on observed absorption behaviors.

Understanding Absorption and Market Dynamics

Key Concepts of Absorption in Trading

• The concept of absorption indicates that price shouldn't drop unless there are more buyers present. Observing the numbers, such as 77 and 79, is crucial for understanding market dynamics.

• Reactive sellers are essential; their presence confirms that sellers are stepping up to absorb buyers. This interaction is vital for validating short positions.

• Immediate seller activity shows reactive selling, indicating that previous buyers have been absorbed. A notable delta of 11 suggests a significant shift in market sentiment.

Pulling and Stacking Mechanisms

• Pulling refers to the process where sellers stack up against buyers, creating pressure on prices. An example illustrates how price interacts with levels set by traders like Clauddio.

• For effective downward continuation, it's important to see an increase in seller numbers while buyer numbers decrease significantly (e.g., from 114 to 5).

• Monitoring the ask delta versus bidder delta helps visualize pulling and stacking dynamics more clearly within the market context.

Observations on Seller Activity

• Continuous stacking of sellers indicates a strong bearish sentiment; this can be observed when prices consistently drop as more sellers enter the market.

• The relationship between increasing seller numbers and decreasing buyer numbers highlights a clear trend towards bearishness in price action.

Understanding Market Interactions

• Stacking occurs when both buyer and seller numbers interact dynamically; observing these changes provides insights into market strength or weakness.

• Price behavior near key levels should show rapid movement followed by slowing down, indicating potential absorption points where buyers may get overwhelmed.

• A significant reduction in buyer presence (from higher counts like 39 or 101 down to just one at 28), alongside increased seller activity, signals a critical moment for traders to assess market conditions effectively.