Exhaustion bars are one bar ultra short term reversal patterns. A bullish exhaustion bar opens with a gap down. Then, it works its way up to close near its top. A bearish exhaustion bar opens with a gap up before moving down to close as a bearish bar. Predicting a trend reversal is a tricky art. If you are in the game of predicting trend reversals that you should read this post as your search for the holy grail maybe over after reading this post. Have you ever heard of exhaustion bars? If you haven’t then it means you are a new to this game. Exhaustion bars are pretty good trend reversal signals. A gap is one of the most important special trading price bar configurations. A gap is a major, visible discontinuity between two price bars on a chart. Exhaustion gaps occur at the end of a trend, signaling that the party’s over. Volume is usually low.
This is a good video that explains what are exhaustion bars and why they are important.
This is another good video on buying exhaustion and when you should hold.
This video explains why you should look for exhaustion candles and how they will help you in trading!
Now as Andrew says in his video an exhaustion bar is not a buy or sell signal but it does give you an important clue that the market is loosing stream and there is a likely trend reversal in near future. You should look for the confirmation candle. So how we do it?
The Sequential Exhaustion Indicator is based on the methodology of Thomas Demark. Thomas Demark is considered to be one of the great market technicians of the world….The Sequential Indicator was created by Demark in the mid 70’s before charting software was available to traders. The purpose of its design was to help him locate high probability zones where the prevailing trend was likely to end…
After reading the above post, you should have a basic idea of how pro traders use the concept of exhaustion bars in their trading. There is a sequence of nine bars that you should follow before a new trend is confirmed. When a new trend is confirmed, you should start the process of looking for new exhaustion bars in the reverse. You shouls also go through this 5 page PDF. In this 5 page PDF, Kurt Magnus, head of foreign exchange sales at Westpac bank in London, discusses Tom DeMark’s (TD) Sequential Indicator TM, his preferred technique for timing position taking in the FX markets.