July 24, 2021

Bulls against bears: we study bear and bull absorption

4 min read
Bulls against bears: we study bear and bull absorption

These patterns – bearish or bullish absorption – can be found quite often. However, this model, like any professional tool, provides certain rules of use.

What are the reasons for the “bearish absorption” on the chart or the “bullish absorption” pattern? Why in some cases, the pattern brings income, and in others – turns into a loss? How can you track down a failed transaction? These questions are asked by many traders. Well, let’s try to give the most comprehensive answers to them.

The “Absorption” figure (in English, it is called the engulfing pattern) is a figure that is displayed exclusively on Japanese bar charts. In turn, it contains two candlesticks. At the same time, under its influence, it unfolds the previous trend. That is, this figure can be called a reversal. At the same time, the body of the first candlestick should be less than the similar parameter of the second bar. After all, the latter must absorb the first candle. It is noteworthy that these candles have a different color.

bullish absorption on the chart

The  main criteria that allow identifying bullish absorption on the chart or bearish absorption include:

  1. Body bars of different colors. And in this case we are talking about full candles, doji are excluded.
  2. The body of the second bar should completely seize the first body. As for the shadows, they can remain intact. Since the Japanese pay great attention to the cost of closing and opening a session, it is necessary to take into account the requirements that are placed on the indicator, signaling that the second body is going to take control of the first one.
  3. Within the market should actively show a downward or upward trend.
    According to the third recognition criterion, two absorption models are classified. In the event that the downward trend is dominant in the market, and a bullish bar appears, which has completely absorbed the body of the bearish bar, then in this aspect we can speak of a bullish takeover. When all the processes in the market are concentrated on an uptrend, and a bearish bar appears, the body of which is absorbed by the previous bullish bar, then a bearish absorption occurs.

bear bar on the chart

The main features of the absorbing figure

All figures of Japanese bars are distinguished by rather exotic names. But in this particular case, it is quite ordinary. Since one bar seizes the other, due to its large size.
Often the turn after the figure forms a completely new and rather long-term trend. However, it may be longer stretched in time than its predecessor.

“Absorption” is a reliable and frequent figure. At the same time, the degree of its reliability increases if the trader observes it in the overbought or oversold zone. Such tools as Bollinger Bands, Keltner Channels can track down the latter.

Important takeovers

how to fix absorption

To fix the work absorption is easy enough. If we talk about the bullish absorption model, then at some period of time buyers appear to be stronger than the sellers and have the opportunity to block the previous bar of the shortsters. True, in such moments it is necessary to be extremely careful. Perhaps the market maker is looking for new victims and, given the insufficient experience of the overwhelming majority of market players, deliberately places a similar “trap” on the chart. In order not to get into the networks that he has set up, it is necessary to identify places with the maximum expectation that will bring us profit. But how to find such zones?

The answer is obvious. They focus on supporting and resisting levels. Even if luck does not smile on us, and we are faced with a stop-loss, the world will not collapse. We will catch up and even stay in profit at the expense of future typical transactions.

Among the main nuances that affect the improvement of the reliability of absorption should be highlighted:

  1. The presence of a new minimum (maximum) value on the second bar of the model. In the event that you get such an indicator on a chart, then it has good reliability.
  2. The imbalance in the dimensions of the bodies, which the first and second bar of the model possess. Simply put, if the second bar exceeds the size of the first bar, the signal will be very reliable. In this case, the last bar can completely seize the previous ones.
  3. When the second absorption bar is released in large volume, the indicator is also extremely reliable. It is best if it has an actual volume that contains information about the amount of currency sold or purchased. In this case, the trader can rely on objective data that relate to the volume. However, no one provides access to such information.
  4. If absorption occurs after a rush. Then we can say that the market is oversaturated with purchase / sale transactions.