Do you look for or trade exhaustion? | Forex Factory

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Do you look for or trade exhaustion?

  • #1
  • First Post: Edited 2:09pm May 2, 2016 11:49am | Edited 2:09pm
Hello all,

Second time I am starting a thread here. I have been studying exhaustion lately, as I think if I could find a reliable way to spot it I could dramatically improve my trading. So let me try to explain what i mean.

I consider exhaustion from an order flow point of view. Meaning simply this...(using a bullish example). When all those who wish to buy have done so and there is no one (in the immediate future) left to buy. You can use that conversely for a sell.

Why do I want to be able to spot this? Because I believe that when the buying has exhausted (on a long term or short term basis) that price will most likely reverse even for a short while until new price swings attract other participants.

Thus I am looking for a way to identify that condition in the price structure. I have looked at Large candles and some price patterns like hammers and shooting starts (affectionately referred to here as "pin bars") but do no see anything consistent. Likewise I have looked at oscillator divergence and again see nothing that is consistent enough to be called an "edge".

So my question to you is this: Do you look for or trade exhaustion? If so are you willing to discuss here how you spot it?
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  • #2
  • May 2, 2016 12:02pm May 2, 2016 12:02pm
An example of the areas I can identify (in retrospect) as areas of exhaustion
Attached Image (click to enlarge)
Click to Enlarge Name: usdjpy-d1-fxdd.png Size: 36 KB

You thoughts?
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  • #3
  • May 2, 2016 12:02pm May 2, 2016 12:02pm
hi don , best of look with the thread. i always try to look for exhaustion , i find it is generally best to spot on longer term candles ie. at least 4 hr , day maybe week
  • #4
  • May 2, 2016 12:05pm May 2, 2016 12:05pm
Quoting nutts
hi don , best of look with the thread. i always try to look for exhaustion , i find it is generally best to spot on longer term candles ie. at least 4 hr , day maybe week
Thank you for a quick reply nutts...

I greatly appreciate your thoughts...HOW do you look for it? Do you have a rule set or a particular pattern you look for?
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  • #5
  • May 2, 2016 6:12pm May 2, 2016 6:12pm
Seems that is what all of your oscillators and trend indicators are 'trying' to help you identify (RSI, DeMarker, SuperTrend, Stochastic, ZigZag, Fractals, Parabolic SAR, Standard Deviation, many more), along with everyone drawing support and resistance lines.
  • #6
  • May 2, 2016 7:32pm May 2, 2016 7:32pm
Quoting DonPato
An example of the areas I can identify (in retrospect) as areas of exhaustion {image} You thoughts?
The areas you identified on the chart as exhaustion areas is no good. It would seem that every swing high/low are areas of exhaustion.

I wrote my own indicator to identify(sorry,not sharing) the tradable exhaustion area with alert so that I don't have to screen stare. It repaints but the purpose is to draw my attention to those exhaustion areas.

http://i.imgur.com/AvP0mit.png
  • #7
  • May 2, 2016 9:48pm May 2, 2016 9:48pm
Quoting skyway
{quote} The areas you identified on the chart as exhaustion areas is no good. It would seem that every swing high/low are areas of exhaustion. I wrote my own indicator to identify(sorry,not sharing) the tradable exhaustion area with alert so that I don't have to screen stare. It repaints but the purpose is to draw my attention to those exhaustion areas. {image}
Congratulations skyway it would appear that these areas are indeed what I am trying to find. I completely understand that you don't want to share your indicator but would you be willing to discuss the process or logic you use to find these areas. I imagine that there is a rule set that you initially used to code the logic in the indicator

BTW looking for swing highs and lows is exactly what I am aming at, but need to some kind of protocol or rule set to begin the long process of determining the edge (if any).

Any thoughts you'd be willing to share?
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  • #8
  • May 3, 2016 12:42pm May 3, 2016 12:42pm
Hi DonPato.

I am doing a research on high reward to risk trading. In fact I was about to start a new thread today on the subject, but I preferred to work in the background for now.

As you know, high RR will probably be around tops and bottoms.

My initial work was on intraday trading, I assumed than any daily break high/low might become a top/bottom. So I sold every break high on hourly close (London session ) with tight stops. Of course I got stopped many times, but when you catch the real top, oh man, you will cover all the losses plus extra profit.

My point is: if trading this blindly generates profit, what if it was traded smartly.

I invite you to have a look at my last post in my Need4Speed thread.

more on this later ...

Regards,

Khalil

(PS: I am posting using phone so I won't be able to post any charts).
No guts, no glory
  • #9
  • May 3, 2016 2:17pm May 3, 2016 2:17pm
Quoting abokwaik
Hi DonPato. I am doing a research on high reward to risk trading. In fact I was about to start a new thread today on the subject, but I preferred to work in the background for now. As you know, high RR will probably be around tops and bottoms. My initial work was on intraday trading, I assumed than any daily break high/low might become a top/bottom. So I sold every break high on hourly close (London session ) with tight stops. Of course I got stopped many times, but when you catch the real top, oh man, you will cover all the losses plus extra profit....

this attracted my attention - as i also tested this when i first started -- just do random entries with small stop losses. it seems you will come out ahead.. but the killer is slippage.. usually at the top and bottom, the spreads are higher since thats when liquidity providers have high spreads (because of sudden move up/down, their risk is higher).. and then you entries and stops both will have 2-4 times more slippage than average.

but if you can combine that with some other signal, you can have effective system to capture trends - not a holy grail but possibly positive pnl...
Think : Trade : Live Life
  • #10
  • Edited 9:08pm May 3, 2016 8:47pm | Edited 9:08pm
Quoting DonPato
{quote} Congratulations skyway it would appear that these areas are indeed what I am trying to find. I completely understand that you don't want to share your indicator but would you be willing to discuss the process or logic you use to find these areas. I imagine that there is a rule set that you initially used to code the logic in the indicator BTW looking for swing highs and lows is exactly what I am aming at, but need to some kind of protocol or rule set to begin the long process of determining the edge (if any). Any thoughts you'd be willing...
There're 2 parts to the way I approach this.

1. Determine the potential swing highest/lowest.

[1]I don't use static levels like previous/current day high/low or S/R or anything like that. I use dynamic bands like TMA or Hurst channels(remember that the bands repaint.). Price breaks upper band - potential swing highest, Price breaks lower band - potential swing lowest.

[2] For 1min tf charts, I use the mtf 5m band, one timeframe higher. Or mtf 15m band.

[3] mtf 15m band could be the potential target ? Consider momentum strength in point 2.

[4] Put both 5/15 min bands on 1m charts to get clearer picture.

2. Determine the momentum strength of this swing identified in 1.

[1] Need to research the oscillators that provide exact measurement parameters. The oscillators must give unique quality that identify weak swings. For example, CCI readings must not exceed +- 150 for the swing. Why ? Becos if the swing is strong and volatile, the possibility of reversal is small it most likely will continue is same direction, there is higher possibility of whipsaw price action and reversal magnitude is small.

[2] It can be one oscillator or a combination of oscillators. Consider usage of 1 or 2 timeframes higher.

[3] Look for weakening readings or divergence.

Hope this helps in your research.

Edit - Example low volatility period in tokyo market just happened.

http://i.imgur.com/l0pxkck.png
  • #11
  • May 3, 2016 8:59pm May 3, 2016 8:59pm
Quoting DonPato
Hello all, Second time I am starting a thread here. I have been studying exhaustion lately, as I think if I could find a reliable way to spot it I could dramatically improve my trading. So let me try to explain what i mean. I consider exhaustion from an order flow point of view. Meaning simply this...(using a bullish example). When all those who wish to buy have done so and there is no one (in the immediate future) left to buy. You can use that conversely for a sell. Why do I want to be able to spot this? Because I believe that when the buying has...
Oscillators compare current price to the average of price of the last X bars. Divergence happens when there are two swings in the same direction and the 2nd swing's high or low is closer to the average price of its last X bars than the 1st swing's high or low is to the 1st swings last X bars. You don't need an indicator of any kind to spot divergence. It shouldn't even be called divergence. Should just be called price.

Exhaustion is rather easy to spot. It's a channel. Its not the high or low of a swing. In an uptrend, its the point where price stops moving up and just moves sideways for a bit. This doesn't mean price will now go down, it just means price has stopped moving up.

Take your chart for example
Attached Image (click to enlarge)
Click to Enlarge Name: usdjpy-d1-fxdd.png Size: 23 KB


A. Move Down

B. Channel (Exhaustion)

Between B and C there's a spike up followed by a..

C. Move Down

D. Channel (Exhaustion)

E. Move Down

F. Channel Exhaustion

Take any chart and do this. Identify the channels and breaks, then pick a channel and look at it on a lower time frame. Identify the channels and breaks again. Rinse and repeat.

Rather than looking a single candle, a set of candles, or a derivative of price (indicator) just look at what price is doing. Is it within a channel or did it just break out of a channel? Is it going up or down? From there, create your measurements.
  • #12
  • May 4, 2016 3:11am May 4, 2016 3:11am
Quoting stt
{quote} this attracted my attention - as i also tested this when i first started -- just do random entries with small stop losses. it seems you will come out ahead.. but the killer is slippage.. usually at the top and bottom, the spreads are higher since thats when liquidity providers have high spreads (because of sudden move up/down, their risk is higher).. and then you entries and stops both will have 2-4 times more slippage than average. but if you can combine that with some other signal, you can have effective system to capture trends - not...
Right. For this I use a commission-based broker with tight spreads.

This is today's example on GBPUSD (you can check it on my High RR Trade Explorer)

is there better place to short ?

Attached Image (click to enlarge)
Click to Enlarge Name: GBPUSDM5.PNG Size: 55 KB


As you can see, after daily high was broken, I sold on 3 occasions, 2 stopped out with minimum loss, and third survived.
I already closed half of the 3rd trade at a profit that covers 2 times the total loss of the 2 lost trades.
And I will leave the remaining half running for at least another double, or it will be stopped out and I will lose nothing.

PS: This technique requires nerves of steel, where you have to accept several losses until you get a runner. And then you have to be sooo patient on profit taking.
Yesterday I took profit after 75 pips profit, I thought that was it for the day, but then GU went down another 130 pips .
No guts, no glory
  • #13
  • May 4, 2016 2:16pm May 4, 2016 2:16pm
Hey Good Lookin!!-

What you describe as an exhaustion range or flat price action, I refer to as order flow balance. Many others call it accumulation or distribution...but those are not the areas I am looking to take advantage of. Instead I am trying to find that point in the price action where all the participants on one side have executed...and there is no one left. This is usually (within 5-10 pips) where price will reverse...the later participants are the first to bail out when price moves against them and this causes a cascade effect pushing price the other way...I'm sure you've seen it...a point where price just wont move any further then turns and goes the other way...HARD.

Ranges do not fit that criteria...in fact the indicate the opposite. That participants are lined up on both sides slugging it out, and the one with the most volume on their side wins...
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  • #14
  • May 4, 2016 2:19pm May 4, 2016 2:19pm
Skyway,

Thanks for the info you provided...I am greatly appreciative. I didn't realize it was so involved with indicators. I will do some research and look into it. I am normally not to confidence about the information provided by indicators and oscillators because they are all a derivative of price, and therefore late to indicate useful. But I will look into it...thank you
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  • #15
  • May 4, 2016 2:25pm May 4, 2016 2:25pm
Abowalk,

Thank you for your reply. I have actually experimented a bit with something very similar to what you are suggesting, but have had disastrous results. One day I missed a big beautiful trend because I was trying to short the top every time there was a new top.

What I am looking for is a more targeted method to find exhaustion in any move...not "blindly feeling" my way.

I am not necessarily wanting it to find "tops and bottoms" but more like the end of a retracement for a move back into the trend. But those areas (referred to in this forum as "swing points") are really tops and bottoms of pull backs or corrections and are the best points to join and on going market flow or trend.
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  • #16
  • May 4, 2016 2:45pm May 4, 2016 2:45pm
I think most all of us understand the concept of "buy the dips" or "sell the rallies" to be the most productive way to trade trends. The question always becomes...now that the market is pulling back or correcting, WHERE (what price) to I enter to rejoin the trend?
enMany use fibonacci levels or "support/resistance" levels, some use "supply and demand" areas. But what we are all looking for is to find that point where the current retrace has exhausted and will go no further. That is the point to enter, and requires a very small stop loss. At some point this happens with every move and learning to recognize this will also allow one to exit that move with great efficiency.

For me the secret is in order flow, but since we are not privy to the order books we can never really know for sure. However, as order flow leave price action foot prints, we can extrapolate that condition based on price behavior. From my observations I have seen points where price will go to and just sit there...then turn away and run.

I will find it, but I am confident that point will not be found with a lagging indicator or by enduring a 90% loss ratio.

Attached Image (click to enlarge)
Click to Enlarge Name: Screenshot1.png Size: 30 KB

This screen shot shows something of what I am trying to capture, but haven't quite got it yet. Note the colored bars. Each of these represents an anomaly. An up bar with mostly selling volume, or a down bar with mostly buying volume. Yet even when looking at reliable volume stats, the bar in question is late. That is because by the time the move is reflected in the volume stats, it is still too late. requiring a much wider stop and therefore an unrealistic profit target.
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  • #17
  • May 4, 2016 3:37pm May 4, 2016 3:37pm
Quoting DonPato
Hey Good Lookin!!- What you describe as an exhaustion range or flat price action, I refer to as order flow balance. Many others call it accumulation or distribution...but those are not the areas I am looking to take advantage of. Instead I am trying to find that point in the price action where all the participants on one side have executed...and there is no one left. This is usually (within 5-10 pips) where price will reverse...the later participants are the first to bail out when price moves against them and this causes a cascade effect pushing...
Ranges do fit into that criteria. Those strong moves are just summarized price. Price will always push 1 way then range for a bit and then push again. Take the exhaustion marked on you UJ chart. I used the same one in this chart

Monthly - looks like nothing.
Weekly - clearly looks like the move you speak of. " point where price just wont move any further then turns and goes the other way...HARD"
Daily - again clearly looks like the move you speak of
4 Hour - looks like price ranged before going down
30 Minute - just a big range
1 Minute - This looks like the move you speak of and its the high of a higher tf range.

Attached Image (click to enlarge)
Click to Enlarge Name: UJ Late April.png Size: 166 KB


If you're just doing your analysis from the daily and up then maybe some sort of retrace measurement or other thing could get you in.
If you consider all TFs then you can maybe find a place to take a trade that presents a low risk high reward entry to trade in whatever direction our mental coin has flipped.

The sharp move after the range was due to BOJ policy statement, its very interesting that price would revisit that previous high before moving on. You also have to consider if its a news release that drove that price movement.
  • #18
  • May 4, 2016 3:44pm May 4, 2016 3:44pm
Abokwaiks chart from earlier is the same.

Attached Image (click to enlarge)
Click to Enlarge Name: GU 2016.05.04.png Size: 134 KB


Just a rejection from a high in a range.
  • #19
  • May 6, 2016 5:15am May 6, 2016 5:15am
Quoting DonPato
I think most all of us understand the concept of "buy the dips" or "sell the rallies" to be the most productive way to trade trends. The question always becomes...now that the market is pulling back or correcting, WHERE (what price) to I enter to rejoin the trend?
here are a few charts to maybe help you. i also use order flow, but just because we dont have the book or cant see the numbers the big guys are putting their entries, does not mean we cant trade just like them..... they are looking at the same information that we do, and that is, the chart..... "price is everything" : redsword.....

i look for extremes in price to pick my entries. they tend to be at tops and bottoms. i will explain further how i enter it and their are a few things to take into account when entering a trend. need to run out the house till next week. but will explain in detail how i enter a trend at the top or bottom will small SL etc etc. sorry got to run.
GBPUSD short term chart. was sleeping when this one got triggered with tight SL below the low of demand.

Attached Image (click to enlarge)
Click to Enlarge Name: 1 GBPUSD short term.png Size: 17 KB


USDJPY also short term, will need to break above the small TL and we go high.... same principle but i am taking a counter trade, so will be plaing a small TP at the flip. i tend to trade longer term (4h, Daily) as i have 2 business i have to keep my head on top. but the principle is the same and you can apply it to any time frame, any chart.

Attached Image (click to enlarge)
Click to Enlarge Name: USDJPY sHORT TERM.png Size: 18 KB


Quoting DonPato
enMany use fibonacci levels or "support/resistance" levels, some use "supply and demand" areas. But what we are all looking for is to find that point where the current retrace has exhausted and will go no further. That is the point to enter, and requires a very small stop loss. At some point this happens with every move and learning to recognize this will also allow one to exit that move with great efficiency. For me the secret is in order flow, but since we are not privy to the order books we can never really know for sure. However, as order flow.....
wold like to give my food for thought on this.

off for a small holiday to whales
Indicators only Indicate, Price action dictates.
  • #20
  • May 6, 2016 1:56pm May 6, 2016 1:56pm
I think I may be on to something. I am taking a page from harmonics and fibonacci extensions. I have yet to develop a protocol for using it and then test it for probability. However what I am seeing is that on those vertical runs where all the retail traders are clamoring to "join the trend", a fib extensión of the last impulse move will exhaust between the 127.2% & 161.8% levels. This will apply to most all time frames and I think may be the formation of "harmonic" patterns (or just simple fractal price structure). I will give more info this weekend with some charts as examples of my observations. Nothing solid yet and I have still to develop a rule set and test it but progress I think.
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