The Volume Absorption Principle
I’m here to empower you with some educational gold. So sit back, relax and read away.
Every once in a while you might hear me use a phrase that sounds new – terms like volume absorption strategy, volume profile indicator, etc.
Well, when that happens, make sure to let me know – don’t hesitate to drop your questions in chat and speak up.
I want to hear from you and help make you a better, more confident trader.
I’ve been trading for years with some of the industry’s best traders from all over and in that time I’ve picked up a lot.
By now, some of it is just automatic for me these days.
So, when I got this question, “Voz, what do you mean by volume absorption?” I knew I needed to take a second and get this information out there.
Today I’m taking a break from my regular Pump Up the Close content to explain more about this principle – volume absorption.
Why? Well, because it is a BIG idea.
I want you to understand what is behind this idea and what it means when you hear me use this phrase.
Let’s break it down in three smaller chunks:
- Leaving the value area
- Entering the thin zone
- Searching for support
Leaving the Value Area
Volume absorption is the principle that once price leaves a heavily traded area, the volume of the new trading activity will get absorbed into the less heavily traded area. This activity will build up the number of shares traded in what currently appears as a thin zone.
When the price makes this dynamic, it tends to move rapidly. Price action moving in this way spreads the trade statistics across a larger price range.
That’s the opportunity I’m looking to capture. To put it simply, I want to jump on the ride just before it speeds up!
I don’t want to stand in line waiting forever. I want to jump through the empty lightning lane, flash my ticket and take off! Boom and zoom baby!!
So I’m constantly watching for this kind of a volume setup. It all starts when I see prices leaving the value area. Let’s look at an example.
Here’s a chart from a stock I was looking at early in June, Blackstone (BX). Notice how the price and volume created a value area on June 2, but then look at what happened on June 3.
After that the market calmed down, but it never did go back above the line.
Now look at what is below the value area on this chart. I saw this pretty clear thin zone there.
I knew if the price were to leave the value area, it could get absorbed into the thin zone and fall fast.
Entering the Thin Zone
The thin zone is like a dry sponge. It will draw trading volume to it and through it.
I knew if the price were to leave the value area, it could get absorbed into the thin zone and it would likely move rapidly from one support line, and travel quickly to the next.
You can see in the chart above that all happened. In this case, the movement happened mostly overnight. But look at where the market found support: at the next value area down.
That my lovelies is why I trade the volume profile. It tells you where to look if you know how to read it!
Searching for Support
This setup led to a fantastic opportunity over a three day period. In fact, here is a larger look at the trade.
Selling short like Kenny Glick does is one way to capture it. But another way to do this is by buying put options.
If you bought one of BX’s at-the-money put options with 30 days until expiration, you probably would have paid around 6.00 per share for it (or $600 for one contract).
By the close of business on the Monday morning after those put options would have exceeded $21.00 per share, netting you more than 250% on the trade. Not bad for a weekend with Voz!
Now I didn’t call that trade out in the room because it was an advanced move, but my peeps can verify that I did talk about it to them!
I’m bringing it out here just because it makes for a great educational tool. When I’m talking about volume absorption, I’m talking about a trade that can move rapidly once it gets going.
So when you hear me use that phrase “volume absorption,” pay close attention to what I’m saying next. It could be the difference between a good trade and a GREAT trade!!
And on that note… have a FABULOUS weekend lovelies and I’ll see you back for our LIVE Pump Up the Close show next week.
Olivia “Voz” Voznenko
Founder, Trade the Close
June 30 2022
Leave a Reply