An Exhaustion Bar is a bar which signals

the exhaustion of the trend in the current direction. In other words an

exhaustion bar is “A bar of last seller” in case of a downtrend and “A bar of
last buyer”in case of an uptrend.

Having said that when a party cannot take the price further in their direction,naturally the other party comes in ,
takes charge and reverses the direction of the trend.

The Psychology

Lets assume that we have a group

of people,say 100 people who decides to go for a casual running. After running for few KM's few of
them will say “I am exhausted. I cannot run further”. They will quit running.

After running further, another bunch of runners will say “I am exhausted. I can’t run
further” and they also will quit running.

This goes on and on and then there will be a stage where only few will be left in the running. Now a stage will come
where the last person left in the running will say “I
am exhausted” and he stops running. That means no one is left now in the
running.This means all are exhausted in the running.

The same way an exhaustion bar works and if we can figure out that
exhaustion bar with all the tools available on hand, we will be in a big trade
for sure!!.The reason is an exhaustion bar is formed at exact tops and bottoms most of the times.In forex with wide
variety of pairs available at the counter ,one can trade this technique to make lifetime gains.

Timeframes
The exhaustion bars are found on
all Time frames as trend also exists on all Timeframes. However as a thumb rule
“Higher the Time frame, higher will be the
accuracy as well as the profitability”. We cannot expect a 5 Minute exhaustion bar
to fetch 500 pips and at the same time we cannot deny a daily exhaustion bar
fetching 1500 pips!!

Identification

When we come to practical part

of trading, it is the identification of an exhaustion bar which is the key to
success under this way of trading. As per my trading experience and observations, an
exhaustion bar has 4 key elements which makes it really powerfull as well as
meaningfull.

1. A wide range bar ( a bar with

long body).

2. A long wick at the bottom of

the bar and no or negligible wick at the top of the bar in case of “Bear exhaustion bar” and

a long wick at the top and no or

negligible wick at the bottom of the bar in case of “Bull exhuation bar”.

3. Extreme volume and

4. Bar forming at a key support or resistance

area including a Round Number (RN) and Big Round Number ( BRN ).

Going further, making little

modifications to the conservative theory,an exhaustion bar need not necessarily
have to be at the end of an extended move. It can be at a retest level as well as at a retracement level.Thus to
identify an exhaustion bar, what all we need is the 4 key elements as mentioned
above and any variations of these 4 key elements . A good trader always adapts and does not stick to rigidness.

Trading the Exhaustion Bars

1. Entry: Entry depends on the trading style of a Trader.There can be three types of entries

A. An aggressive trader will make

an entry immediately on the opening of the next bar following the exhaustion
bar.

B. A conservative trader will

make an entry on break of either high or low of the bar following an exhaustion
bar as the case may be.

C. This category of traders will enter in to a position only once price breaks the opening price of the exhaustion bar.

( Please refer the charts posted below to get a clear idea on above noted points )

2. Stop: The logical stop will be on either the low or high of the
exhaustion bar as the case may be.However depending upon risk appetite of a trader there can be variations to this
matter as well which we are not going to discuss here.

3. Covering the positions:The covering part differs from trader to

trader depending on their past experience,judgement, analytical skills and
their ability in identifying the strength or weakness of the move. However as a
thumb rule we cover 50% of the positions at an R:R of 1:1 , next 25% at an R:R
of 1:1.5 and rest we trail till we see a weakness in the current move. (The weakness of a move can be identified by
using stoch,MACD,RSI,Trendlines,the construction of candles or any other tools
as per the comfortness of a trader).

First we will understand each

part visually and then we shall move on to real chart examples.
In the above example :-

1. Bar
“A” represents an exhaustion bar

2. Bar
“B”represents a reversal bar

3. Bar
“C” represents entry bar.

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Scenario 1: Where the bar following the exhaustion bar is an Inside bar.:

The entry is on break of high or

low of bar “B” as the case may be
 The stop is below or above bar
“A” as the case may be.

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Scenario 2: When the immediate bar following the Exhaustion bar breaks the high/low
of Exhaustion bar :-in such cases the entry will be on break of high/low of
exhaustion bar.

Now lets Look at some real chart

examples which have produced magnificent gains during recent times.
1. USD/CAD- Exhaustion bar at 1.0000 levels brings price down to 0.9500 levels.

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2. USD /JPY-Daily- Exhaustion at 95 levels leads to a big rally taking the price to 110 levels.
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3. USD/JPY -Daily -During Dec 2008 we have signals of reversal and then a retracement to end up in an exhaustion
bar .The retesting of December levels signals a double bottom leading to big rally.
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4. Same pair - This one is during march this year.The exhaustion is apparent.
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5. One more USD/JPY daily- One profitable trade over and another , the latest trade is in progress!!
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6. EU-Daily.
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7. Trades on GU - 4 hour chart.

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8. On EU 1 hour chart.
lvels

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9. trades on EU 5 Minutes chart. While trading this technique on short timeframes like 5 minutes, one has to be very
cautious as every other bar may look like an exhaustion bar.
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Conclusion:

1. This technique can be used on

all the time frames to trade profitably.

2. If used with other indicators

like MACD/RSI/STOCHASTICS/FIBS/RESISTANCE AND SUPPORT LEVELS it will produce handsome results.
3. Since it catches the exact
bottoms and tops most of the times, the Risk Reward ratio is fantastic even if the % of winning trades are less.

4. Nothing in the market works

cent per cent. Hence one has to make judicious mix of indicators/levels and
price action to reap the excellent benefits offered by this technique.

6 .In real time lot of bars may

come in the disguise of an exhaustion bar.Hence a trader has to be very
cautious. Infact that is the job of every trader!!!.