Exhaustion is a situation in the market where the majority of traders trade in the same side of transaction (either short or long) and the same asset. Consequently, there are only a few traders on the other side of the transaction.
For instance, the majority of traders have bought and now, they want to sell the assets. In that situation, there will be no more buyer they can sell to. Thus, the price may fall.
Most of the time, reversal signals the probable reversal of the current trend, since it shows the level of supply and demand. It indicates the overbought or oversold in the market.
How does it Work?
As stated in the dictionaries, exhaustion refers to the condition when someone is about to surrender or someone is tired of fighting. If a person is exhausted, then, he or she is too tired to continue.
Exhaustion, in financial market also has a similar meaning, based on the auctions. At the auction, there will be bidders and sellers. Bidders are the people who bid on an asset when they want to buy. The price will climb up if there are more bidders than sellers. Contrarily, if there are a number of sellers, then the price will drop.
Thus, the trend experience exhaustion, if a certain price’s asset has moved too far in one single direction. That can happen if the number of seller goes higher than the buyer.
In short, exhaustion occurs if there is no sufficient support from buyers or sellers to keep moving up or down. During that moment, usually, traders expect a trend reversal. In all of sudden, the buyers sit are full of sellers, or vice versa.
Ways to Identify an Exhaustion
There are several ways to identify exhaustion. First, traders can check the Commitment of Traders Report, that is published every week. The report shows the position levels of markets in the future.
Second, if you are one of the technical traders who identify uptrends as a series of rising swing lows and swing highs, then you can find the exhaustion if there are lower swing lows and lower swing highs