Exhaustion Pattern Trade – 10 Year Bonds 9/23/13

Exhaustion Pattern Trade

The Exhaustion pattern trade is meant to call a market top and a market bottom.  The trade following is your opportunity to buy in at the test of the low.  It is even more powerful when combined with the ZoneTraderPro filters.  The trade is further confirmed with a chart of the 10 year bonds with ZoneTraderPro applied.

9/23/13 ES Exhaustion Trade Pattern
9/23/13 ES Exhaustion Trade Pattern

This Exhaustion pattern trade is setup very nicely by a TICK divergence of 200.  The previous low was -627 and at the area of the trade is was only -428.  Additionally the Euro trade filter was moving in the favor of the trade.  The risk on this trade was 4 ticks, and the market never moved against the trade.  The maximum favorable excursion was 4.5 points.

The trade also illustrates the use of the TICK filter and the trend trade.  There was a trend trade which immediately followed the exhaustion trade pattern.  However as the market price dropped to the entry point the TICK low was 78 lower than the previous low, thus the trade was filtered out.  You can set this filter to a higher number than the default zero, once you become familiar with the filter and the patterns.

Bond Chart Trade Pattern

The bond charts had setup perfectly to confirm this trade.  As you can see from the chart, the bonds touch resistance just as the long ES exhaustion trade pattern is being indicated.  Notice how the Bonds price is very accurately contained in the support and resistance of the software after the trade.  These setups occur every day, but without ZoneTraderPro you do not know what these price levels of support and resistance are.

9/23/13 Bond Chart Trade Pattern
9/23/13 Bond Chart Trade Pattern

 

7 Perfect Pattern Trades in One Afternoon

7 Perfect Pattern Trades in One Afternoon – 19.75 SP Points

This chart developed on 9/06/13 in the afternoon starting just after 2:00 PM EST. The maximum favorable excursion was 19.75 points for 7 different pattern trades!!!  The total adverse excursion was just 4 ticks, with no losing trades.

7 Perfect Trades for 19.75 S&P Points
7 Perfect Trades for 19.75 S&P Points

What is a Perfect Pattern Trade?

A perfect pattern trade is when the market is performing logically and forming tradable patterns.  The first hour of patterns involves 4 short trades shown below.

4 Perfect Short Trades
4 Perfect Short Trades

The short trades start with an exhaustion pattern that marks a top as it is intended to do.  You will also note TICK divergence.  The previous high TICK was 782 and the divergent high was only 470, with price trading 4 ticks higher.  The exhaustion trade has no adverse excursion and is good for 2.75 points.

The next trade is both a Reversal and Exhaust Trend pattern.  We have a lower low TICK of -471 and a lower high of just 446.  In addition the was a Euro Divergence signal.  That trade was good for 2.25 points.

The next trade is a trend trade, with a lower tick low of -477 and a lower tick high of 374.  Again we see Euro Divergence also and a trade good for 2.25 points.

The next trade is also a trend trade, with a lower tick low of -719 and a lower tick high of 336.  Again we see Euro Divergence also and a trade good for 4.25 points.

There is something very important to note with ALL of the trades.  That is the importance of having a trading plan and using the statistics.  The important chart is shown below.

ZoneTraderPro Statistics
ZoneTraderPro Statistics

This chart is telling me that when I have an (eSignal) countertrend trade (which occurs when the market trades a blue countertrend zone) there is a 50.1% there will not be adverse excursion. So what does that mean here? It means that if you set a target at or below the blue countertrend zone there is only a 50% chance that you get filled. The other 50% of the time the market retraces and you lose at least 6 ticks that you just earned.  Only 1 of the 7 trades exceeded the blue zone.  It is easy to get into a pattern trade, but do you use the power of the pattern to exit?

Countertrend zone
Countertrend zone Excursions

 

What follows is a bottoming pattern and ZoneTraderPro again calls a bottom with an Exhaustion Trade.

90613 3 Pattern Trades
90613 3 Pattern Trades

First we start with an Exhaustion pattern trade that is again has a higher low TICK divergence of -842.  This trade is good for 2.5 points.

The next trade is an Exhaust Trend pattern trade that has a higher tick high of 328 and a higher TICK low of -500, which is exactly what you like to see.  This trade is good for 2.25 points. Notice that after you would exit the trade that a trend trade pattern does not form at support, because the tick filter (the little red dot) keeps you out of the trade and is a signal the market is going lower.

The market going lower sets up the last reversal/trend pattern trade worth 3.75 points.  We have a lower tick low of -806 and a lower TICK high of 303.

New ZoneTraderPro Trend Trade Pattern

Trend Trade Pattern

In the coming days the NinjaTrader version of ZoneTraderPro will be updated to include the trend trade pattern.  The update is free to all registered users.

The update will feature a new pattern to the Ninja version.  The new pattern is the eSignal version of the trend trade, but with a filter.  The pattern for the trend trade is simple.  First the market will trade at a blue countertrend zone (where you see -554 TICK value) and then market price will retrace to the intermediate zone (at the 293 TICK value).

NinjaTrader Trend Trade
NinjaTrader Trend Trade

Pattern Filter

There will be a filter built into the trade also.  The filter will look at the TICK numbers and will have an initial value set to zero.  A setting of zero will mean that as in the case of this short trade shown above, there must be a lower low at the blue counter trend zone, and a lower high when the price reaches the intermediate zone for the trade.  Setting the filter to a higher value will loosen that requirement by the number input.  If you want to allow the TICK value to be exceeded by 50 the variable Tick Filter would be set at 50.  You also have the option of completely disabling the trend trade pattern by setting the enabled value to false.

Trend Trade Indicator
Trend Trade Indicator

The current version of the software identifies the pattern directly following an exhaustion trade as a trend trade.  This will be changed, and now be called the Exhaust Trend pattern.

Two patterns – Same Trade

It is possible to have two patterns appear on a chart, especially following an exhaustion.  It does not mean that there is greater odds if there are two signals, it just means that two patterns formed.

Here we see a being indicated

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reversal trade pattern and a trend trade pattern
Reversal trade pattern and a trend trade pattern