Thought Process: The price of a stock or any other security rises when buyers are willing to buy at a higher price. As the price moves up, so does their profits. Traders in long positions track the prices carefully, and want each subsequent price candle to close higher. That does happen, but most of the time, what you will see is something like this:
This is very much a bullish move, but you can make few observations.
1. Each Price candle is closing higher than the previous candle.
2. But each Price candle’s close from the previous candle is at a decreasing rate.
How can we Trade to take advantage of such moves?
The traders who got long this move up in the prices are definitely feeling good, as they feel confident about their trade entry and focus on rising prices. However, these traders have a tendency to overlook the declining rate of this bullish move. I am also guilty of being in that mindset so that I can squeeze the most profit from this up thrust. Nevertheless, when the eventual bearish move happens, there is no other choice but to get out by selling your position. And when this move down occurs, we can try to profit from that bearish price action. That is the thought process behind this Exhaustive Price Action set up.
Exhaustive Price Action: There are two kinds of exhaustive price action.
a) The Bullish Exhaustive Price Action
b) The Bearish Exhaustive Price Action
Let me give you an example of a Bullish Exhaustive price action and some key points to consider as you attempt to profit from such a move.
Below is a $AMZN hourly price chart. On February 1, by mid-day, it dropped big and the close of each of these consecutive bearish candles was below the low of previous candle. Nice bearish price action, but the rate of drop kept on decreasing with each red candle. After the weekend when market opened on Monday, we saw a nice bullish hourly candle. That served as our trigger candle, and the stock saw a decent 15 point bullish move from there.