Do you look for or trade exhaustion?

Using fibonacci extensions, between 127.2 and 161.8 of the previous impulse move, you can clearly see that these extensions are areas where buyers came into the market and reversed price giving a long entry opportunity. Not how my actual entry was higher because I was using typical "demand vs supply" zones...also known as support/resistance areas. Clearly the fibo gave a more accurate entry zone, and predicted a temporary break of support followed by a rush buying


Note again how in going the other way after the selling exhausted and buying pushed price to the top of a range, how price extended the range and once again gave a zone of exhaustion that proved reliable and allowed me to take partial profits on the position which was actually entered in the previous exhaustion zone predicted by the fibo extentions.


I continue to observe these moves and am starting to record when they are the most accurate at predicting not only areas of exhaustion but also possible reversals. I am finding anecdotal evidence that the second wave is usually the most accurate at predicting a final exhaustion phase. This may be the result of a 1-5 impulse wave, or perhaps even an ABC correction, but it appears to be consistent.

I have yet to put together a rule set for using this, but I am finding it repeats with some observational consistency.

My theory for this phenomenon is quite simple. All directional order flows exhaust at some point because there comes a point when all those who wish to participate in a particular direction at a particular time have done so, and there are no further orders coming into the market to continue pushing price in the given direction...thus price stalls and begins to move the other way.

This point causes two things to happen. Those who were early in the move begin to take profit, causing the order flow to stall...then those who were the last to participate begin to close out as they don't see price moving their direction. These two things combined causes price to cascade in the opposite direction, which then begins to hit stops for those participating in the original direction...as the stops are hit the order flow reverses strongly and new participants see this move and jump on in the opposite direction and further exacerbate the order flow imbalance.

This causes a cascade acceleration and thus a reversal in price movement. These are the areas I am looking to participate in...either to take profit on a position (at the most efficient area) or to enter against the retail crowd with a minimal risk exposure, and take advantage of the late participant who must close quickly or lose more.

Hey DonPato,

Whenever i see your name i read it fast and think DonPotatoe. What culture does Pato come from?

Anyway, I'd like to point out something to you. The two trades that you've shown are the same type of trades that i was talking about before.

For example..

This is a chart of the same two USDMXN moves.



1st trade at the low is just price respecting a higher time frame range.
2nd at the high is just price respecting a higher time frame range.

If you consider who the buyers and sellers that you speak of are, do you really think that they use a fibonacci anything to measure they're entries or exits? Whats more plausible when attempting to figure out where someone will trade again, a fibonacci anything or where there was heavy selling and buying before?

Please understand that i am not trying to debunk fibs, i used em at one point but now i don't. Think about it and really ask yourself, with institutions and banks at the helm of these price movements, with there billions of dollars of capital at risk, and the competitive nature of trading, and their unending ability employ highly able individuals to run statistical analysis of different occurrences in price, can you really say a fib extension is what they're looking to buy and sell at? The only ones who use fibs are the retail crowd.

While looking for times when it worked, you should also be looking for times when it didn't work. Also, instead of using historical price use try to set these fib zones on price in realtime and see how it works out.

Pato is a pseudonym...or "nom de plume" It is Spanish for "duck"...get it? I live in Mexico

I understand completely what you are saying and feel your skepticism over this issue. In fact I had to overcome my own just to consider it, but I really think I this has something to offer to those who are open to it. Was price respecting the previous support/resistance areas...or demand/supply areas? I say "yes", but also see that there were a confluence of factors in the same area from various other technical analysis techniques that converged on this area, which caused traders (institutional or otherwise) to take action resulting in the order flow, reversal, which caused the price to "respect" the afore mentioned areas.

Using multiple time frames is one way of doing it, and I certainly agree on the fractal nature of price aciton. However, none of these really points out with any consistency what I am looking for which is a consistent to find or project where price exhaustion may or may not occur.

I have left behind the desire to try and speculate on WHY trader do what they do, where they do it...I only wish to find the dominant order flow and follow that until it exhausts and the get out...will the move eventually continue? I have no idea...I just make a small profit and will look for another similar situation to exploit.

I would like to now draw your attention to gold...

Note how the daily chart predicted where the order flow would peak and then balance for 10 weeks...


Note also here how the next impulse move higher peaked just above the resulting range and is now generating what looks like a false break (at this point). Is price simply retesting the previous resistance (no support) area? We shall see in a few days. Meanwhile I have placed a short that is now working and will look for the next exhaustion signal that will either balance the order flow or reverse back into what now looks like a bullish trend that has formed.

Having never worked for an institution or know anyone who has, I have no idea what if any analysis techniques are used, and understand that most use very sophisticated computer algos to trade. However, I also know that they can only do so the same way everyone else does...by placing orders in the market...which affects the order flow, which then affects the price. Thus the resulting price acts as a "foot print" to what may soon happen in the near future. As well since it is the institutions who establish the areas of demand and supply or support and resistance wouldn't it also make sense that they do so simply to provide an area of liquidity (by other trader's orders) to trade against when the need arises?

You said quite a bit there, much of which i'm curious about. I'm not attacking here, just keep that in mind.

Was price respecting the previous support/resistance areas...or demand/supply areas? I say "yes", but also see that there were a confluence of factors in the same area from various other technical analysis techniques that converged on this area, which caused traders (institutional or otherwise) to take action resulting in the order flow, reversal, which caused the price to "respect" the afore mentioned areas.

So are you saying that you believe the extensions will indicate areas of confluence that you are willing to use as a basis to wager your money?

Using multiple time frames is one way of doing it, and I certainly agree on the fractal nature of price aciton. However, none of these really points out with any consistency what I am looking for which is a consistent to find or project where price exhaustion may or may not occur.

It is consistent. Consistent enough to put money on. All of your examples thus far have been a result of a higher time frame range. I don't know if you said this on purpose but if you're really "looking for a consistent way to find something that may or may not occur" then just flip a coin. You'll consistently get heads or tails.

I would like to now draw your attention to gold...
Note how the daily chart predicted where the order flow would peak and then balance for 10 weeks...

The fibs got breached to the top and the bottom significantly over and over. The peak was actually above the fibs. From a non biased point of view, you could have thrown up any fib extension between 0 and 190 and been able to say what you've said. This is only one scenario that you've mentioned but it holds true across all.

Note also here how the next impulse move higher peaked just above the resulting range and is now generating what looks like a false break (at this point). Is price simply retesting the previous resistance (no support) area? We shall see in a few days.



Definitely is testing higher TF resistance. Also, do you have an objective method of deciding which move up to base Fibs on? What made you choose the low and high of the green arrow and not any of the others? All the arrows represent a combination of low to highs in that channel.

Also, as it turns out, it seems that you are trading with the test of a high from a weekly trading range and you don't need to wait to see if price has reacted. It did.

Having never worked for an institution or know anyone who has, I have no idea what if any analysis techniques are used, and understand that most use very sophisticated computer algos to trade. However, I also know that they can only do so the same way everyone else does...by placing orders in the market...which affects the order flow, which then affects the price. Thus the resulting price acts as a "foot print" to what may soon happen in the near future. As well since it is the institutions who establish the areas of demand and supply or support and resistance wouldn't it also make sense that they do so simply to provide an area of liquidity (by other trader's orders) to trade against when the need arises?

Well, if this "foot print" existed, wouldn't the revisit of the area it occurred result in the high or low of a trading range? Even if it eventually pushed through, wouldn't you have been able to profit from the price movement of the revisit to the "foot print" on a lower time frame? I think you would. I'm even willing to put money on it.
Institutions trade against other institutions and banks. We retailers trade a synthetic market created by our broker that follows the market that banks and institutions trade. Its not a clear yes or no and its also not as simple as you stated. But from me, it would take a couple of pages to explain (not that you need an explanation from me).

I think you're hitting on the correct trading method but from an area that just obfuscates things.

For lack of time this is my current response.

Hello again... Yes I'm afraid I have done a "mind dump" on my thoughts without really providing any context... I apologize. As I mentioned in the beginning... I am trying to find a consistent way to find the "trapped trader" so that his stop fuels my trade (as is what is happening now on gold ). I have made an observation that I must now test. But I still must find or develop a rule set that is consistent... As you mentioned not just any two swing points but those that meet a specific order flow criteria. I am currently considering those areas that appear to have all traders moving in one direction... Vertical price movement. These moves attract the late participants who will eventually fuel my trade. After I have developed a rule set and thoroughly tested it's inherent probabilities then incorporate that with multiple time frames and my current trading techniques then... Yes... I will put money on these areas... Assuming the probability is favorable.

This is the start of a process and one I am familiar with and not worried about insofar as time. It may turn out that I am executing in those same areas as higher time frame levels... But for me it will be with some statistical and probability backing. As well I think this may provide some insight as to WHICH levels are the more likely to produce favorable results.

I don't feel attacked at all. No worries.

3 words: Volume Spread Analysis.

Can you be more specific? How does volume spread analysis show exhaustion. I understand the basic premise of this theory but do not understand how this would point to exhaustion. Can you explain?

​Very high volume (volume higher than previous bars) on bullish/bearish moves represents bullish/bearish strength. However when you see very high volume with subsequent retrace (such as pinbar or candle with significant wick) then volume likely to represent institutional selling on upmove or buying on down move. I'm no expert with VSA. There are other threads on FF. Also it is worth looking at Hiddengaps posts for info on VSA or similar.

​"Master the Markets" by Tom Williams

Thank you. That is what I was familiar with. However I've not heard how that shows exhaustion or if the volume stats in forex are relevant. As I am sure you know, volume in forex is a tick counter and not really transaction size volume.

Only VSA thread i read completely through was VSA by Clifton. Good thread on VSA in my opinion.

I use simply Volume + Delta (Buy-Sell difference)
Have to be careful as these "bursts" do not always mean instant pullback or reversal.

You can also combine this with statistics / price action.

E.g.: You know that the average swing on your timeframe is around 20-30 ticks.
Then if you start seeing this around 5-10 ticks, you dont get in, however if you see these around 30-40ticks (swing is likely to end soon) then probabilities are starting to stack in your favor.

I studied delta statistic and still look at them occasionally in the futures market. However, there is one thing I learned above all when looking at volume...you must have VOLUME...not tick counting. That is all you get in forex. Tick counting. A tick higher or lower speaks nothing about how much volume was transacted. Without this information the number of ticks transacted at a certain level is really meaningless.

I have since moved on to looking at order flow and how that translates to price action. I have found this approach far more viable but again...need to find out a way to "see" or anticipate price exhaustion, as explained previously. So far nothing I've read about VSA explains it. Only that larger volume on smaller candles MAY indicate a change in order flow, but I've not found that to be true. Earlier I posted a chart that showed anomalous candles (post 16)...up candles with more selling than buying and down candles with more buying than selling...these are effectively a change over in delta values. They are either late or just dead wrong...which is why I do not trade with them.

Winston Reed partially answered your question...You can get very valuable information from VSA including (but not limited to) Possible reversals, Strong supply and demand levels, continuation or exhaustion patterns...etc. I recommend 'Master the markets' by Tom Williams and A Complete Guide To Volume Price Analysis by Anna Coulling

Inceptionist...thanks for sending these. I've read them but will look it over again to try and find something I've missed. These books are very technical, and I would imagine that is what i appear to be looking for. IT IS NOT...

I am looking at order flow and how that affects price. I do not trust or rely on tick values as volume "indicators"...and that is all we get here in forex. Most of the examples listed in these books are from indices and futures markets where the volumes are actual volume statistics. And yes they hold value, but not in the case of forex.

Let me give you an example. You and I transact a single mini lot at a given price and it registers a tick on the market. Then another trader transacts at the next tick higher, for 500 lots. This registers another tick. Which tick has more driving force in the market? Out tiny mini lot or the greater volume? Of course the greater volume...however, all we see here on our charts is two ticks...

I'm afraid I do not consider tick volume which is all we will ever have access to, a viable or valuable part of my forex trading. Thus without actual volume, the "VSA" analysis becomes dead in the water, because it is missing a major component. Not that it is any more or less valuable, it is just that it cannot work if you don't have all the information needed.

I thank you all for your contributions, but feel I am not getting through about what it is am seeking...I guess you people here might call it a "price action" solution...but that is really NOT what it is.

I will continue my research here, but I am looking for a solution that involves recognizing order flow and how that effects price....let me try and be more specific.

Whether you accept it or not, price fluctuation is the result of orders coming into the market. These orders have a certain amount of push to them depending on the volume (real volume) that is transacted or asking to be transacted. Obviously the side with the higher volume will drive price higher or lower. Just as we cannot see the real volume values in Forex, we also cannot see where the orders are being placed, because the forex market is decentralized. However we can deduce that from the resulting price action. If prices are rising there is a greater volume trying to tract buys than sells. I realize this is over simplified but it is the basic "truth" of the market.

Thus I am looking for that point and it comes at least once every day, where All those buyers have all participated...the early buyer, the late buyer...the stop loss buyer...all of them...since there is no one left to buy, price stalls...and will not move any higher...it does not vacillate, or range, it STOPS...

This is what forms the high and conversely the low of each day....week...month...etc. This is the exhaustion point. THIS is the point I want to enter a short.

Of course I cannot possibly know where or when this point will occur, but I am looking (perhaps futilely) for a consistent way to project with some reasonable accuracy where that point is LIKELY to occur based on probabilities. First I must develop a method to detect that...then test it for accuracy...then run the probabilities.

Is this more clear?

Here is an example of what I am looking at...while they are not all this obvious, this is the clearest from my perspective.

Lets look at the first move down...look at how the selling increases and goes "vertical". This is the clue that ALL the sellers are in...the buyers have stopped out and new sellers are entering late in the game. So at some point there is no one left to sell, and price stops moving down.

Then as price ticks up, the late seller stops out...this higher price move, induces more sellers...the retail crowd to start selling and a new low...the ultimate low is formed. Now look at what happens if we place a fibonacci on the previous low and the new lower high...


Note how price tapped the 127.2 extension (circled) and THAT was the last low...from there sellers are stopping out, which means buy orders are flooding into the market. Also new buyers are coming in and accelerating price higher, and once again, price goes "vertical", and exhausts. At this top, note how the late buyer cannot push price any higher, and thus forms an inside bar...it all caves in from there...

Where is the cool part...if I apply a fibonacci to the very next set of swing points...look at where price STOPS moving lower...

Right at the 161.8 extension...Is this because people are taking profit at the level? perhaps, but think it is more likely that is where the professional buyers have come in with significant volume (real volume) and caused the late shorts to stop out and thus another cascade upward repeats...and the cycle continues...

Hi Don if you like order flow and are looking for selling/buying exhaustion there are a few third party tools that you can chose from order flow analytics or NOFT which is a ninja order flow trading. I prefer OFA but there are lots to chose from best of luck.

Thank you Astinminn...I will look into it.