An overlooked strategy: Market Exhaustion

What is market exhaustion?

It refers to a point in trading where the momentum of price begins to weaken (uptrend or downtrend), which results in a potential pause, or correction. It occurs when price has been pushed to the extreme.

How to spot market exhaustion

1. Over-extending prices

When emotion (green or fear) causes price to rise or fall sharply to the extremes buyers or sellers experience "exhaustion". This means that there are fewer people willing to continue pushing the price further.

2. Loss of momentum

Using indicators such as the Relative Strength Index (RSI) & Moving Average Convergence Divergence (MACD) allow traders to determine whether or not momentum is fading.

The RSI measures oversold and overbought levels which. Being oversold indicates that price has been rising too quick and could correct soon, whilst being overbought indicates a rapid selloff that could result in a correction.

The MACD utilizes the covergence of the signal line. Price trading above (bullish) the signal that start to cross below the signal line shows momentum slowing down which could trigger a price correction.

3.Candle stick reversal patterns

Candlestick with long wicks are often signs on exhaustion. In simple trading psychology, this means that he price moved far in one direction but was inevitably rejected. Patterns like doji, engulfing candles, hammers, and shooting stars are all potential candidates.

Follow along for practical examples of market exhaustion.