Exhaustion Trend Trading Pattern

Exhaustion Trend Trading Pattern

The Exhaustion Trend Trading Pattern looks to take advantage of the 1st trading pattern after the exhaustion pattern has signaled a top or bottom.  Typical retail traders see the small retracement after a large move as an opportunity to try and trade with the trend.  Unfortunately for them, profit taking and trend reversal will cause them to lose money.  The pattern involves a low risk stop usually 4 ticks or less.

Exhaustion Trend Trading Pattern
Exhaustion Trend Trading Pattern

Tick Divergence Exhaustion Trading Pattern

A very nice pattern occurs when TICK divergence occurs at the exhaustion trading pattern preceding the exhaustion trend trading pattern.  In the below picture we see the market in a strong bullish trend and the exhaustion trading pattern marking the top.  We see tick divergence at the top, followed by a lower tick low leading into the exhaustion trend trading pattern.  At the Exhaustion Trend trading pattern we have a lower low TICK and a lower high TICK at the area of the trade.  There is also Euro divergence at the trade.  ZoneTraderPro is always looking at the status of the dollar to determine if there is a divergence that would assist the current trade.

While not shown on the chart, the Exhaustion trade risked just 4 ticks and 2 points of profit. The exhaustion trend trading pattern had just 3 ticks of risk and 10 ticks of profit.

Tick Divergence Exhaustion Trading Pattern
Tick Divergence Exhaustion Trading Pattern

 

Exhaustion Trading Pattern

The ZoneTraderPro Exhaustion Trading Pattern is a pattern that usually occurs after a strong market move without any retracement.  This first retracement is the opportunity for retail traders to enter the perceived trend. Unfortunately for them the program trade that started the trend is over.  The market found value and profit taking has started.

In the below picture the trade occurs after the market open.  The first exhaustion trade occurs on the open and would be avoided as there is no prior TICK information.  The TICK opened strong at 630.  However as the market trades into the second exhaustion trade there is a TICK divergence, the market tops, and this leads to a successful exhaustion short trading pattern.

Exhaustion Trading Pattern
Exhaustion Trading Pattern

 

Exhaustion trading pattern marking market tops and bottoms

The exhaustion trading pattern also does an excellent job at calling a market tops and market bottoms.  In the below described picture we see the exhaustion trade marking both a market bottom and a market top.  The suggested stop loss of 4 ticks of risk is also illustrated in the picture. Also note the TICK divergence on the market top.

Exhaustion trading pattern
Exhaustion trading pattern marking market tops and bottom with TICK divergence

Importance of the ZoneTraderPro Theory

Here we see three successful consecutive trades with starts with the exhaustion trading pattern.  After the exhaustion, we have an exhaustion trend trading pattern and a trend trading pattern.  In those series of trades we see lower TICK lows and lower TICK highs.

What is the most important feature for users of ZoneTraderPro is the ability to use the zones and the statistics behind the zones.  All three trades end at the blue counter trend zone.  The statistics indicate that 50% of the time the market will not trade into the blue zone. So if the target was set one tick short of the blue zone, there would have been three successful trades.  If the profit target had been set lower, you lost at least 6 ticks and were not able to re-enter the trade and take its’ full profit.

Exhaustion Trade and ZoneTraderPro Theory
Exhaustion Trade and ZoneTraderPro Theory

Reversal Trading Pattern

Reversal Trading Pattern

The ZoneTraderPro Reversal trading pattern is a low risk high reward trade. In a typical reversal a trend trade will trade to the opposing intermediate zone and the market will reverse.

The example below is the perfect setup into a reversal trade. The TICK strategy and the web site statistics from the web site will make the trade setup a low risk trade. The TICK strategy for this trade starts at the blue counter trend zone that has a  TICK of -401.

The next important point of this setup comes from the web site statistics. If there is a 4 tick adverse excursion from a failed trend trade, there is less than a 9% chance the trend trade will succeed. Five ticks have less than a 6% chance, and 6 ticks or more have less than a 4% chance of success.  In this example the trend trade has 4 ticks of adverse excursion and the TICK is making a higher high at  403.

The market trades to the green intermediate support zone, where the Reversal trade is indicated, the risk is 4 ticks, and the statistics indicate that in about 9% of the time, this stop will be hit. The stop was only 4 ticks. The TICK has made a higher low of -343. The green background indicates the Euro-dollar classification system became bullish for stocks.

Reversal Trading Pattern
Reversal Trading Pattern

Another very common pattern, and very profitable pattern, is the reversal trade that follows an Exhaustion pattern. Because an Exhaustion pattern normally marks a market top or market bottom, this trade is a test of the top or bottom.

In the eSignal example below, we first have the Exhaustion pattern marking the high. Any Trend trade that follows an Exhaustion trade is, by definition, a High Risk Trend trade (a high risk trend is automatically filtered in the NinjaTrader version), and that is identified on the chart below. The high risk trend trade has 5 ticks of adverse excursion. Your stop would have been 4-5 ticks away, and your profit target over 2 points away. Then a third short trade is good for an additional 2 points of profit. In all 3 of these trades you had no adverse excursion.

Exhaustion, Trend and Reversal Trading Pattern
Exhaustion, Trend and Reversal Trading Pattern

Trend Trading Pattern

Trend Trading Pattern

The ZoneTraderPro trend trading pattern is the basic trading pattern of the system. The theory behind the trend trading pattern is that when a trend is established the market will continue in the direction of that trend, following the pattern of profit taking and trend resumption.

ZoneTraderPro prints these areas of support and resistance in advance of the market trading at these zones. If you know where those zones are in advance, you can set limit orders at these zones.  The blue counter trend zones are defined in advance of the market trading there.  This is important because traders will want to place the target to take profit from the trade.  It is extremely important to note that 50% of the time the market approaches a blue countertrend zone, price does not trade through the zone and the market retraces at least 6 ticks.  Why give up 6 ticks of profit because you didn’t know the zone?

In the picture below, the three Trend trades are easily identified as the market moves from the blue counter trend zone back to the intermediate red zone. The blue countertrend zone is the typical area where the smart money will start to cover the bets they made when the trend initiated. At this point, the retail traders finally have a trading signal, but quickly find out they are the dumb money and weak hands, as the institutional traders cover their trades.

Trend Trading Pattern
Trend Trading Pattern

 

The ZoneTraderPro TICK Filter

ZoneTraderPro has the TICK filter built into the pattern.  In a long trading pattern, the TICK filter looks for higher-highs and higher-lows going into the trade.  The filter setting can be adjusted to allow for minor adjustments to the rule.  In the picture below we see two trend trades.  The first short trend trading pattern has lower TICK lows and lower TICK highs going into the trade.  The market trades into a second trend trading pattern.  There was a significantly lower tick low, but the tick high was exceeded by 50 ticks. It is important to look at the light blue counter trend zones.  If you were short from the 1424 hours exhaustion trading pattern you knew where 50% of the time, the market stops and begins a retracement.  The same thing happens at the second trend trade, which ends with an exhaustion calling the bottom, 1 tick short of the blue counter trend zone.

Trend Trading Pattern with TICK Filter
Trend Trading Pattern with TICK Filter

 

TICK Filter Divergence

It is very easy to see TICK divergence at the blue counter trend zones.  This develops an excellent out of the box trading pattern.  In the picture below, the S&P is making a higher high, but the TICK is divergent.  When the TICK fails to make a higher high a low risk trade can be taken.  The trend trade long trend trade would be avoided because of the trading filter.

TICK Filter Divergence
TICK Filter Divergence