EXHAUSTION ZONES

INDICATOR
by
PATTERNALPHA
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 EXHAUSTION ZONES

EXHAUSTION ZONES

The Exhaustion zone indicator visualizes the daily average trend expectancy. It shows how
far the daily trend is likely to move.

Trading with the Exhaustion zones may help you find better trades, improve your exits and
optimize your trend trading strategies.

In this manual, we show you how to set up and get started with the indicator.
Also make sure to watch your introduction video for even more tips: CLICK TO WATCH

Please take the time to watch this video first. We explain step by step on how to set the indicator up
and how to use it in your trading.

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#1 General

1.1 Settings
When you open the settings of the Exhaustion zone indicator, you have a few options
that allow you to control the appearance of the Exhaustion zones.

Show History: When enabled, the indicator

will show you the Exhaustion zones for the
last 12 days, in addition to the current daily
zone. When disabled, you only see the
current daily zone.

Display Daily: When enabled, the

Exhaustion zone indicator shows you the
Exhaustion zones for daily price action. This
means, every day, you get a new Exhaustion
zone. This option is ideal for trading the lower
timeframes and for day trading in general.

Display Weekly: When enabled, the

indicator shows you the weekly exhaustion
zones. For each week, you get one
exhaustion zone. This option is used for
traders on the higher timeframes.

Display Locked State: When enabled you

see a lock icon at the currently active
Exhaustion zone.

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1.2 Visualization
Each day (or each week, depending on the setting), the indicator plots two red boxes onto
your price action charts. One box above and one box below the price action.

Those are the so-called Exhaustion

zones. The indicator calculates, based on
previous price history, how far the price is
to move on that specific day.

When the price action reaches the red

zone, there is a high likelihood that the
daily trend may end, or even reverse. We
will go into using the zones in-depth later.

As you can see, the red boxes have

different shading. The dark red is the first
exhaustion zone. On regular trending
days, there is a high likelihood that the
price will respond to the first zone.

When there is high momentum and the

market is trending heavily, the price may
break through the first zone. In such
cases, the second light red exhaustion
zone is often the end for a high
momentum trend. This is often the case
during high impact news events or during
other market shocks.

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1.3 Zone reached

When a new trading day starts, the

indicator plots the two zones above and
below the price action.

When the price reaches one of the zones,

that zone will stay locked. In the example
on the left, the price reached the lower
zone first.

In this case, the upper zone disappeared,

and the lower zone will not move anymore.
It shows that the daily price action has
likely reached its end.

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#2 Using the Exhaustion Zones

There are many use cases on how to use the Exhaustion zones in your trading.

In this part, we are going to introduce the most used applications for the indicator. However,
you may be creative and experiment with other ways on how to integrate the Exhaustion
zones into your trading.

Better Trades
Assuming a trend trader is looking for trading opportunities, it is important to estimate how far
the trend is likely to go. The more room a trend has, the bigger your potential winning trade
is.

In the example below, the overall chart is in a downtrend. The trader identified a flag pattern
that can be used to enter a trade when the breakout happens.

The lower exhaustion zone shows that there is plenty of room to the downside. The trader,
therefore, can trade with high confidence that his trade may go for an extended amount of
points.

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The following screenshot shows that after the flag breakout, the trend developed into the
exhaustion zone where it ultimately stopped. Using exhaustion zones to estimate the profit
potential is a great first use case!

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On the other hand, getting into a breakout trade when the next exhaustion zone is very close
is usually not recommended because the trend is likely to stop here.

And, as anticipated, after the breakout, the price reversed when hitting the exhaustion zone.

Using the Exhaustion indicator that way may help you find better trades and also avoid
trades that won’t go for too long.

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For swing traders, or traders who prefer the higher timeframes, activating the Weekly
exhaustion zones can be beneficial too.

The screenshot below shows a trendline breakout out. At the time of the breakout, the lower
exhaustion zone was far enough away to provide a large enough Reward:Risk Ratio.

Using the exhaustion zone distance in such a way can help find better targets and also
improve your trade selection process.

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Reversal Trends

Sometimes, it may pay off to look for reversal trading opportunities at the exhaustion zone.

However, we DO NOT recommend to just go against the exhaustion zone when the price is
hitting it. There will be instances when the price just breaks through the complete Exhaustion
zone.

In this context, we recommend waiting for information that the price is actually moving away
from the exhaustion zone.

In the screenshot below, the price reversed strongly away from the upper zone. But it wasn’t
until the following consolidation broke that the new trend fully emerged.

A better approach may be to activate the Weekly Exhaustion zones and look for reversal
opportunities here. It is less likely to see the price break through a weekly exhaustion zone
(although it can and will happen). In the screenshot below, the uptrend stopped after hitting
the upper zone. And after the following double top, the trend completely reversed to the
downside.

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The screenshot below shows that there will be occasions when a strong trend just moves
into an exhaustion zone and never looks back.

The scenario below shows that, at no point, did the price show a breakout scenario – unlike
the example above. That’s why we always recommend to wait for additional information to
trade against an exhaustion zone.

Following the above trend for another week shows that after hitting the next exhaustion zone,
the trend reversed that time. Now we also have the confluence of a trendline break.

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After two strong trending weeks, the market showed weakness and here it would have made
more sense to look for a short on that trendline break.

Don’t forget to subscribe to our YouTube channel for regular updates and trading ideas for
the Exhaustion zone indicator.
https://www.youtube.com/channel/UCsEK_Fx23OfuhCJBmbnRwmQ

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