Order Flow Absorption

Order Flow Absorption is the process where incoming market orders are met by opposing limit orders, preventing the price from moving further in the direction of the market orders. This phenomenon effectively stops a trend and often leads to a consolidation phase or a reversal.

It is a hallmark of institutional participation, as it requires significant capital to absorb large market orders without allowing the price to slip. In the context of derivatives, this is often seen when a large market sell order is fully consumed by limit buyers at a specific support level.

By tracking order flow, traders can identify these absorption points and anticipate potential turning points in the market. This requires a deep understanding of the limit order book and the ability to read real-time trade data.