The Exhaustion Reversal [TRADING STRATEGY] — Transcript

Learn how to identify exhaustion reversals using volume profile and footprint charts to improve trading strategies and market timing.

Key Takeaways

Exhaustion reversals signal potential market turning points caused by a surge and subsequent drop in volume.
Volume profile and footprint charts provide deeper insight into market structure than candlesticks alone.
Identifying the type of reversal helps traders anticipate market behavior when price returns to key levels.
Exhaustion reversals often involve two-way trading and short-term sideways action before continuation or reversal.
Proper analysis of exhaustion highs and lows can improve trade timing and risk management.

Summary

The video explains exhaustion reversals as a type of excess reversal in volume profile trading.
It distinguishes between three types of reversals: key auction reversals, exhaustion reversals, and absorption reversals.
Volume and footprint charts are critical tools to analyze market highs and lows beyond traditional candlestick or market profile analysis.
Exhaustion reversals occur when a market reaches a crescendo of orders, causing a burst of volatility followed by a volume decline and price drift back.
Understanding how highs and lows are formed helps traders predict future market behavior when prices revisit those levels.
Exhaustion reversals often indicate that the market requires significant effort to continue in the same direction due to completed positioning.
The video uses examples from the Sterling market to illustrate exhaustion highs and the resulting market behavior.
It highlights the importance of differentiating between genuine resistance and exhaustion-induced pullbacks.
The presenter emphasizes the value of footprint charts to analyze buyer and seller interactions at reversal points.
The strategy is part of broader volume profile and footprint trading courses offered by Axia Futures.

Chapters

Full Transcript — Download SRT & Markdown

Speaker A

And in terms of the volume profile, we're going to talk about excess reversals. So, an exhaustion high and low is effectively an excess reversal. I'm going to show you what this looks like on the profiles again. You know, every one of these is a strategy within the volume profile course. So, if you do like this, do consider the volume profile course or the footprint course, you know, once we've obviously completed this stream.

Speaker A

one of these is a strategy within the volume profile course so if you do like this do consider the volume profile course or the footprint course you know once we've obviously completed this stream okay so our training principle

Speaker A

Okay, so our training principle today is very simple but very powerful. It's all about exhaustion reversals. Now, one of the disadvantages you're at when, you know, you're not looking at the footprint chart and you're just purely looking at, say, candlesticks or even the market profiles is that you're actually missing out on what is ultimately creating a high and a low in the market.

Speaker A

say candlesticks or even the market profiles is that you're actually missing out on what is ultimately creating a high and a low in the market okay so what we very often see is we very often see a market maybe comes into an area

Speaker A

Okay, so what we very often see is we very often see a market maybe comes into an area, it sells back off, and we just go and say, okay, well that becomes resistance. Now, this is very dangerous for a very good reason because how this high is made or how the low is made ultimately determines what you can potentially expect to see when we get back to that point.

Speaker A

expect to see when we get back to that point okay and this is why it's so important to be able to define between one or key auction reversals okay we've spoken about that in previous streams so we get key auction reversals I'm just

Speaker A

Okay, and this is why it's so important to be able to define between one or key auction reversals. Okay, we've spoken about that in previous streams. So, we get key auction reversals. I'm just going to put a nice star. The second one is where we get exhaustion reversals, which is the second kind of reversal. And then the third type of reversal is where we get absorption.

Speaker A

are three unique you know ways in which buyers and sellers interact and the market just happens to reverse in other words counter trend okay now based on which one of these three is actually occurring we'll determine what you can

Speaker A

Okay, absorption reversals. Right now, all three of these are three unique, you know, ways in which buyers and sellers interact and the market just happens to reverse. In other words, counter-trend.

Speaker A

show you how powerful this is in a minute when when we obviously bring up the charts now the key determinant between ultimately these three you know different types of reversals you get is the exhaustion one the volume is the key okay so what

Speaker A

Okay, now based on which one of these three is actually occurring, we'll determine what you can expect to see when we get back to that point again. That's why it's imperative, you know, to have a footprint job because you cannot, you begin to analyze the interaction unless you've got a tool like the footprint.

Speaker A

get smaller candle smaller kind of smaller candle much bigger more volatile candle the volume will pick up and ultimately then the volume will just die off can will steadily just see the market start to drift back low okay this

Speaker A

Okay, now I'm going to show you how powerful this is in a minute when we obviously bring up the charts. Now, the key determinant between ultimately these three, you know, different types of reversals you get is the exhaustion one. The volume is the key.

Speaker A

eventually you get a crescendo of orders coming into the market in other words there may be someone stopping out there may be a whole bunch of buyers just hitting the market to get the order fold but the important thing is that there's

Speaker A

Okay, so what you're gonna see in essence is you're gonna see the market approach or be bidding up or trending in one direction. Suddenly, you're gonna get a burst of volatility. So, you're gonna probably have something a little bit like this. So, we get smaller candle, smaller kind of smaller candle, much bigger, more volatile candle. The volume will pick up and ultimately then the volume will just die off. You can will steadily just see the market start to drift back low.

Speaker A

right it's going to require a real effort to continue higher why because well the crescendos happen the Momentum's happen all of the positioning all of the work that needed to be done has been done now in that one single

Speaker A

Okay, this is in essence the depiction of an exhaustion reversal. Now, what occurs, that the basic theory behind an exhaustion reversal is that the entire marketplace gets long into the breaking loads. As you know, prices are rising and rising and rising and cannot stop rising.

Speaker A

tells us that sellers are actually selling the market a market that just drifts off implies that there is more likely someone may be selling to take profit or maybe someone you know looking to enter short-term speculative shorts but there isn't necessarily large time

Speaker A

Eventually, you get a crescendo of orders coming into the market. In other words, there may be someone stopping out, there may be a whole bunch of buyers just hitting the market to get the order filled. But the important thing is that there's a lot of business activity that comes already after a market has moved quite significantly.

Speaker A

the key guys okay if we know it's not sellers entering the market we can then ultimately you know you make some really important you know sort of inferences based on how that high and low is made okay so the one thing I will say right

Speaker A

Okay, and that in essence, that candle right there, that is the exhaustion. Okay, now when a market reaches a phase of exhaustion in essence, right, it's going to require a real effort to continue higher. Why? Because, well, the crescendos happen, the momentum's happen, all of the positioning, all of the work that needed to be done has been done now in that one single candle.

Speaker A

resistance and then they wonder why sometimes through you know the breakouts are very clean and some why sometimes they're not so clean okay now the key understanding and this is the key okay when we approach this exhausted level

Speaker A

Okay, the market becomes exhausted and for that reason, we start to see the market drift back off. Now, note the marketers and sell off it drifts off is a key distinct difference here between the wording.

Speaker A

become very interested okay that way we'll see markets accelerate to the upside okay now what I do want to just point out is very often what happens is when you do have these exhaustion reversals like I showed you in this

Speaker A

Okay, a market that sells off tells us that sellers are actually selling the market. A market that just drifts off implies that there is more likely someone may be selling to take profit or maybe someone, you know, looking to enter short-term speculative shorts, but there isn't necessarily large-time form sellers coming to the market. That is the real key.

Speaker A

highs and lows what you'll see is a lot of two-way trade occurring within that exhaustion area before somebody the market continues higher or lower okay now the example I'm gonna bring across is in the Sterling okay it's in the

Speaker A

Okay, the exhaustion is effectively giving some short-term opportunity for a little bit of sideways action. So, it's not necessarily sell as anything and that's the key, guys.

Speaker A

happened at those highs okay more importantly I'm gonna bring the footprint into it and then I'm gonna give you a little bit of a forecast okay I'm gonna do a little bit of a hairy hindsight I'm gonna make a prediction

Speaker A

Okay, if we know it's not sellers entering the market, we can then ultimately, you know, you make some really important, you know, sort of inferences based on how that high and low is made.

Speaker A

you that if I open it up no just the T POS not just the volatility at the high and all of a sudden the market begins to back off okay so what do we see we don't necessarily see sellers entering but

Speaker A

Okay, so the one thing I will say right as we go forward is what very often happens is people just assume that, you know, because this is a high now, we have got something called resistance.

Speaker A

can look at the swift rejection okay so what this is telling us is that the first time yes we reached a little bit of exhaustion the market backed off the second time we got up there however there was some significant sell side

Speaker A

Okay, and what they then look to do is they then look to play for the breakout of this resistance and then they wonder why sometimes, you know, the breakouts are very clean and sometimes they're not so clean.

Speaker A

being the 23rd okay again notice where the market opens opens where closes and sails off the entire day okay comes back up or what do we see so receive volatility into the high and then we see notice a straight line reversal so what

Speaker A

Okay, now the key understanding, and this is the key, okay, when we approach this exhausted level again, right, there is the potential for stops to occur.

Speaker A

the very next day the market opens sells off tries to go back but what happens it gets very aggressively sold okay so straight away and this is the real key straightaway we can see there is a real defense now being made from 1:29 21

Speaker A

Okay, but the real key is that we need to see initiative, we need to see volume pickup, we need to see the buyers that weren't interested that first time step into the market and become very interested.

Speaker A

shifting to the upside okay now this is the key what kind of price shifting are we gonna get are we gonna get slow trending and a trend up day are we gonna get some stop up what are we

Speaker A

Okay, that way we'll see markets accelerate to the upside.

Speaker A

rotations Kay each one of these footprint you know is effectively a five minute rotation it shows you all the information you need to know the green bar on the left shows you the open of the candle and the close of the candle

Speaker A

Okay, now what I do want to just point out is very often what happens is when you do have these exhaustion reversals like I showed you in this example, what tends to happen is the market does also want to spend a lot of time there.

Speaker A

was made at one twenty nine forty six it was made at seven o'clock at night note outside of cash hours okay quite important so we can see straight away market goes bit up we have a little bit of imbalance and we get this really big

Speaker A

In other words, it turns this area of low volume or this untreated area into a very highly traded area again.

Speaker A

time of day and the average volume being traded okay so nothing was trading before all of a sudden two thousand two hundred contracts market suddenly moves you know from one twenty nine twenty one to forty six is a good twenty five tech

Speaker A

That's why very often exhaustion highs and lows, what you'll see is a lot of two-way trade occurring within that exhaustion area before somebody, the market continues higher or lower.

Speaker A

okay so straight away we can see that this was an exhaustion high that was made it wasn't you know it wasn't anything other than an exhaustion hide was the market exhausted some stops went off and we simply just made a high there

Speaker A

Okay, now the example I'm gonna bring across is in the Sterling.

Speaker A

days hi it was made and I'm just going to scroll across okay so we can see as we come to the next day again notice what happens 11:45 so midday okay obviously look at the volumes traded going into this nothing

Speaker A

Okay, it's in the GBP/USD futures and what we're looking at, I'm gonna start off on the volume profiles, but what we're looking at is the date of the 22nd of August and the 23rd of August.

Speaker A

imbalances okay market suddenly moves from 90s all the way to twenty one's a good thirty one tick move okay and there guy stops again what does the market do slowly starts to grind and grind and grind and grind and fill out the low

Speaker A

Okay, now why I like this is because I'm gonna show you what happened at those highs.

Speaker A

market they're no longer interested to be aggressive at the higher prices now this is the key what we are looking for for a sustained aggressive breakup is we need to see buyers dominate above 120 921 so what I'm telling you is the

Speaker A

Okay, more importantly, I'm gonna bring the footprint into it and then I'm gonna give you a little bit of a forecast.

Speaker A

we can I can show you kind of where we are trading at the moment and we can look how the the the price action traded up around this twenty ones okay so we can see market this morning came up to

Speaker A

Okay, I'm gonna do a little bit of a hairy hindsight. I'm gonna make a prediction that hopefully you guys can watch over the next couple of, as we approach that high made on 23rd and 22nd.

Speaker A

market comes up no one wants to buy ok market Stein to come up are they're gonna keep buying and that's the real key guys one twenty nine twenty one unlocks the pound to the upside but and this is the caveat but it's gonna

Speaker A

Okay, so what we're looking at, you we can see straight away, notice obviously on the 22nd, just want to show you that if I open it up, no, just the TPOs, not just the volatility at the high, and all of a sudden the market begins to back off.

Speaker A

two okay that's a footprint analysis in guy I've got a good understanding there of seeing you know the difference in interaction the first example we had we obviously saw you know late at night and exhaustion high stops went off second

Speaker A

Okay, so what do we see? We don't necessarily see sellers entering but just the market starting to grind low and fill out.

Speaker A

defending this one 29:21 area okay let's get back onto the history of the template then now in terms the strategy is very simple and this is the key we've got to obviously be talking about breakout trading here what we're looking for is the 129 I'm

Speaker A

Okay, now what is interesting and this is what makes this is whether, you know, the volume profile is so key. Notice what happens the next time we come up to this area.

Speaker A

position ourselves long for the test or 129 46 and then obviously some stops to the upside okay now the execution methodology and now this is the key you know brenigan how am I gonna execute how you know what should I do

Speaker A

Can look at the swift rejection.

Speaker A

are the biggest lot of hogwash I've ever heard you cannot assume how buyers and sellers will interact on a breakout you have to watch how the buyers and sellers interact on a breakup now if we see a stop run like this ie nothing happening

Speaker A

Okay, so what this is telling us is that the first time, yes, we reached a little bit of exhaustion, the market backed off. The second time we got up there, however, there was some significant sell-side pressure.

Speaker A

okay why because if we see a stop run to the upside it's very likely we're first gonna fill it out and then potentially go however if we start to see the market go bird and on long the way up it starts

Speaker A

Can that straight away gives us, you know, if we were to put a term on this, that shows us there is significant sell-side pressure at 129.46 to 49.

Speaker A

the upside okay so always make sure when you're looking your targets look at them in terms of how the market is responding okay our question for this week how do I differentiate between noise and real orders on the footprint okay very very

Speaker A

Okay, now I just want to open up the next day being the 23rd.

Speaker A

in the market large orders being traded and this is where the footprint is great because what it does is it colors them in very dark and dark and dark colors and loads of dark colors when we see the

Speaker A

Okay, again, notice where the market opens, opens, where closes and sells off the entire day.

Speaker A

why it's being done what's the purpose of it being done that way we can make decisions on what could be expected to be done going forward right and the second most important thing is to understand ultimately at which price

Speaker A

Okay, comes back up or what do we see? So receive volatility into the high and then we see, notice a straight line reversal, so what we call a V-shape reversal.

Speaker A

understand and interpret how volume is being executed and interacted at different prices okay you do that that is the single most important way to differentiate between noise and real orders look at the volume look where the volume is trading relative to different

Speaker A

Now, what's interesting about this again, what's so significant is the previous night if I open that up again, the market tried to go but and what happened? It got smacked straight back down.

Topics:exhaustion reversalvolume profilefootprint charttrading strategymarket profilevolume analysisorder flowprice actionAxia FuturesSterling market

Frequently Asked Questions

What is an exhaustion reversal in trading?

An exhaustion reversal occurs when the market reaches a peak volume surge, causing a volatile price spike followed by a decline in volume and a price drift back, signaling a potential reversal.

Why are footprint charts important for identifying reversals?

Footprint charts provide detailed order flow data showing buyer and seller interactions, which helps traders distinguish between different types of reversals and better understand market dynamics.

How does an exhaustion reversal differ from other types of reversals?

Exhaustion reversals are characterized by a crescendo of orders and a volume peak leading to a market pullback, whereas key auction reversals and absorption reversals involve different buyer-seller dynamics and volume patterns.

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