Best indicator of Absorption Models
Trading according to Price Action methods requires constant vigilance from the trader - you never know where and in what form the setup appears. Everything trivially rests on the human ability to simultaneously monitor a large number of charts.
Today we’ll look at probably the best indicator of the absorption model - VerticalBarSetup. The indicator not only signals the appearance of new setups, but also automatically calculates the entry level, stop loss and take profit of the transaction. In addition, the indicator visualizes the success of trading on the history, noting on the chart the deals closed by stop and take profit orders.
What is an absorption model?
The absorption model is, in a way, the inside bar, on the contrary. In this case, the external candle “absorbs” what is going in front of it, which indicates a cardinal change in market sentiment.
Usually this setup is formed during uncertainty - the market has not yet decided where to go, as a result of which we observe a temporary consolidation. The next candle just resolves the dispute, absorbing the previous one, bringing fresh liquidity to the market. Punching the tops of the extreme candle is an important signal for a change in trend.
The indicator is installed in a completely standard way. First, go to File - Open the data directory, and go to the MQL4 - Indicators directory. We put the indicator file there and restart the terminal.
We start the indicator by dragging it from the navigator window onto the chart. The settings window will open.
The main indicator settings:
- Size Ratio - filter the size of the first candlestick according to ATR. Here you need to specify the ATR coefficient, which will determine the minimum size of the first candle;
- ATR Period - ATR period for calculating the size of the candle;
- Wicks Ration - coefficient for calculating the maximum shadow length relative to the total size of the candle. It takes values from 0 to 1. A value close to zero will indicate the minimum shadow size.
- Entry Break plus Points - filter in points for placing an order. Required to filter out false breakdowns.
Stop Loss Settings (StopLoss):
- The method of calculating stop loss (in points, high / low or ATR);
- Additional items for filtering spurious emissions;
- ATR multiplier for StopLoss calculation;
- Period for calculating ATR.
Take Profit Settings (TakeProfit):
- Calculation type TakeProfit (in points, ATR or relative to the stop);
- Additional points for TakeProfit 1;
- Additional points for TakeProfit 2;
- Indicator period in case of calculation using ATR values;
- ATR multiplier for TakeProfit 1;
- ATR multiplier for TakeProfit 2;
- The relative size of the first take;
- The relative size of the second take.
The indicator sets up past settings on the chart in the form of red and blue icons (colors can also be changed in the settings). At the same time, all successful setups are displayed as a checkmark inside the square, when closing in the stop is in the form of a cross. This allows, at a glance, to determine the profitability of a strategy in a given section of history.
Recommendations for use
The indicator signals the found setup after satisfying the additional condition - in addition to the formation of the absorption model itself, the next candle should close above its maximum level. Thus, we enter the deal only after confirming the breakdown.
After identifying a new setup, the indicator highlights the area of formation of the absorption model on the chart, as well as the level of entry into the transaction, its direction, stop loss and take profit. The indicator allows you to calculate two profit levels, but the price does not always reach the second profit.
Alternatively, the position can be divided into two parts. We close the first part when the first profit is reached, after which we move the stop to breakeven. Thus, the second part of the position will either be closed at breakeven, or at the second take profit.
It is worth considering that this model shows the result of a local fight between bulls and bears within a few candles and does not reflect the long-term picture. In this regard, no one has canceled the rule of entering by trend, and the use of an additional trend filter, even in the form of a simple moving average, is a completely reasonable solution.
Also, consider areas and levels of support in your trading. As you know, the price in the vast majority is beaten off the level, so it will be the right strategy to trade on the rebound. That is, if the shadow of the absorbing candle falls on an important level of resistance / support, you must enter in the opposite direction from the level.
Objectively, this is one of the best indicators for trading an absorption model. The main distinguishing features of the indicator are visualization of the historical success of the pattern, automatic calculation of the entry level and stop orders, as well as timely signaling when new settings appear - absorption model + confirmation.