How is absorption different from sweeps in technical analysis?

Absorption refers to a price action pattern where large buy or sell orders are executed in a way that absorbs or counters the opposite side’s selling or buying pressure. It indicates that a market participant or a group of participants is actively absorbing the selling (or buying) pressure, preventing prices from moving significantly in the expected direction. This can sometimes lead to a consolidation or reversal in price trends.

For example, in a downtrend, if sellers are actively pushing prices lower but are met with strong buying orders that prevent prices from dropping further, it can indicate absorption by buyers. This might signal a potential reversal or a temporary halt in the downtrend.

Sweeps refer to a trading strategy where a trader or an algorithm places multiple smaller orders at different price levels to fill a larger order. The goal is to execute the order quickly without significantly impacting the market price. This strategy is often used to avoid slippage, which is the difference between the expected price of a trade and the price at which the trade is actually executed due to market fluctuations.

For instance, if a trader wants to buy a large quantity of a stock, instead of placing a single large order that could drive up the price, they might place multiple smaller orders at different price levels. Each order fills a small portion of the larger order, and this process is repeated until the entire order is executed. This way, the trader aims to minimize the impact on the market and achieve a more favorable average execution price.

A reversal or consolidation may occur as a result of purchasing or selling pressure being offset or absorbed by opposing pressure, which is what is meant by the term “absorption” in terms of price movement patterns. On the other hand, sweeps involve a trading method in which smaller orders are issued at multiple price levels to efficiently execute a larger order without significantly disrupting the price.

Stock market dynamics can be complex, and there might be cases where the impact on the stock price isn’t immediate or as straightforward as described.