Absorption Theory

Absorption theory posits that when a large volume of aggressive orders is met by an equal or greater amount of passive limit orders, the price fails to move further. This phenomenon indicates that the market has absorbed the selling or buying pressure at that specific price level.

Traders look for this to identify potential exhaustion points where a trend might be about to reverse. If a massive wave of market selling occurs but the price does not drop, it suggests that a strong buyer is sitting in the order book absorbing the supply.

This is often a precursor to a bullish move. Absorption is a critical concept for understanding how institutional participants influence price without showing their hand through public trades.

It is a hidden battle of strength between market participants.