Climatic & Exhaustion Reversal Bars
A Key Price Action Trading Method used for detecting when a trend is over-extended, which is mainly
to look for a Climatic or Exhaustion Reversal Bars. From an order flow perspective these exhaustion
and climax bars tend to represent a high probability reversal based on the various participants and how
they tend to trade trends.
Key things Traders want to be looking for in spotting these exhaustion and climax reversal bars are;
(i) A Bar that is much larger than the previous price action & ideally the largest bar in the move
(ii) Next Bar does not have follow-through to the up-side if trend is Bullish or to the down-side if
trend is Bearish
(iii) Bar occurs after several bars have been trending in an impulsive fashion in one direction
Although there are other many subtle clues you can look for to amplify the possibility of these climatic
and exhaustion reversal bars, these are the three (3) main ones you want to see in the price action to
look for a trading opportunity.
What does an Exhaustion & Climatic Bar look like?
Zooming into the 4-hr chart below to show the exhaustion or climatic bar.
The first bar to concentrate on (which should naturally stand out) is Bar 1 – which is the largest bar in
the entire series. Up to this point, we can see consistent buying all the way up with the Bulls dominating
price action Bar 1.
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Now if you remember from the very beginning of the article, an exhaustion or climatic bar will
generally mark long or over-extended trends. These bars should have the following characteristics;
(i) Largest Bar in the series
(ii) No follow-through on next Bar
(iii) Occurs after several bars have been trending in an impulsive fashion in one direction
Why do these Exhaustion / Climatic Bars tend to be so large?
When trends are over-extended, they have had a lot of time to attract various players into the market,
with the institutional players being first (1st), the more advanced players who sniff out the new trend
being second (2nd), and the retail traders come third (3rd). The retail traders tend to be last as a whole
because they need the greatest confirmation to enter a trend (generally).
By the end of a trend, as the retail traders get in, you have the greatest imbalance between buyers and
sellers. Those who have not profited from the trend will often chase it feeling like they have to make
money on this move by buying breakouts instead of pullbacks. Additionally, the institutional players
will try one last push to get as much out of the market as they can – thus producing a Climatic or
Exhaustion Bar.
Sometimes, this has an additional purpose of not just squeezing out the most of the current trend, but
trapping new traders long into the market so when they exit, they can also look at reversing the market
using those trapped to fuel the upcoming sell-off.
Now getting back to the Page 1 Chart, if price action had maintained the breakout and held above the
key Resistance level, along with extending the gains, then it would communicate the breakout will
continue. But look at the next bar (Bar 2) and how price action responded. Notice how it immediately
reversed back below the resistance level which was definitely a warning sign the breakout could not
hold the gains.
In these circumstances, you have to ask yourself a few questions;
- If the bulls were in control, how come they could not extend the gains, follow-through?
- Where did they go?
- How come such a strong bar did not extend price further, follow-through?
- Why did sellers immediately push back?
All of these questions should immediately come into mind because they held the key as to whether this
was a legitimate Bull breakout or a false break.
But even if you did not ask all these questions, all the ingredients for the Exhaustion or Climatic Bar
was in play telling you this was likely the end of the move. Even after Bar 2, notice how price then
treated the resistance level not as Support (continuation) but as Resistance (false breakout). Again, go
back to the questions and the breakout just doesn’t add up. So we have a textbook example of Climatic
or Exhaustion Bar.
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How To Trade These Price Action Setups
Usually in an uptrend, look for a second attempt at the key level or a LH (lower high) before attempting
to reverse a strong trend. In a downtrend, look for a second attempt at the key level or a HL (Higher
Low) before attempting to reverse a strong trend. For those wanting a secondary entry, look for a No
Demand / No Supply or Price Action Bar Pattern (Pin Bars, Inverse Pin Bars, Inside Bars, Outside Bars,
2 Matching Lows / Highs & Triple Top / Bottom Lower / Higher Close), then consider taking it in
combination with the Exhaustion or Climatic Bar. But the price action should already show weakening
ahead of the exhaustion before letting you know the offers will hold.
Most often with exhaustion moves, there will be a second (2nd) failed attempt either at the key level, or
producing the lower high giving final confirmation the exhaustion bar is in place and it is reversal time.
Another safe way to trade these Exhaustion or Climatic Bars, is to identify them on High Time Frames
and into the future at Key Levels / Areas. Once these Key Levels / Areas have been drawn, then simply
wait for price to return to them in the future and confirm whether it gives a reversal or a continuation.
Use No Demand / No Supply or Price Action Bar Patterns or Lower Time Frame Ultra High Volume
Areas to make entry. Looking at the chart below shows example for above entry explanation. See the
two (2) Bearish Outside Bars.
Bars 3, 4 and 5, were all being held in check by the level which was the key breakout level, suggesting
the market was using this as Resistance. If it was a trap, price would not have kept producing small
candles below this level (should have been above the level). However, none of these were in place.
The most aggressive entry would be to sell after candle 3 or 4 closed but it always best to wait for return
to the Key Levels with Price Action Bar Patterns or Lower Time Frame Ultra High Volume Areas.
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Why?
They were weak candles after a strong selling candle just below resistance telling us the buyers were
not pushing back with enthusiasm. This would be one way to get in to this with a stop minimally above
the highs of these candles and possible higher.
A conservative entry would have been to sell on the Bearish Outside Bar (“BOB”) after Bar 5, with a
Stop Loss of few pips above the high of Bar 5 if it had made a break above the Resistance. Another
entry is on the failed / second (2nd) attempt after the BOB with a Stop Loss of few pips above that BOB.
The advantage of selling below the low of Bar 4, or on a close below Bar 4, is at this point, any traders
who are trapped long are starting to exit their longs as the losses are starting to mount and increase since
they are below their entry. If Bar 5 does not have a wick above the breakout level, then the stop has to
go above the level minimally, but better to have it above bars 3-5 or possibly higher.
Climatic & Exhaustion Reversal Bars:- Example
USDCAD – Exhaustion Price Action Plays Out (1 - hr chart)
Exhaustion price action in the USDCAD suggesting a likely pullback. As you can see from the chart
below, this is exactly what happened with the pair forming a LH (lower high).
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Climatic & Exhaustion Reversal Bars - Technique to Catch Tops / Bottoms
A simple but highly profitable idea. The idea will be about “Climatic & Exhaustion Bars”.
A Climatic & Exhaustion Bar is a bar which signals the exhaustion of the current trend direction move.
In other words, it is “A Bar of Last Sellers” in case of a downtrend and “A Bar of Last Buyers” in case
of an uptrend.
Having said that when a party cannot take the price further in their direction, naturally the other party
comes in, takes charge and reverses the direction of the trend. Bar closes somewhat in the middle or so.
The Psychology
Let us assume that we have a group of people, say 100 people who decide to go for a casual run (without
a finish point). After running for few KMs’ few of them will say “I am exhausted, I cannot run further”.
They will quit running. After running further, another bunch of runners will say “I am exhausted, I
cannot run further” and they will also quit the run.
This will go on and on and then there will be a stage where only few will be left in the run. Now a stage
will come where the last person left in the run will say “I am exhausted” and he/she stops running. That
means no one is left now in the run. This means all are exhausted in the run.
This is the same way a Climatic & Exhaustion Bar works and if we can figure out that Climatic &
Exhaustion Bar with all the tools available on hand, traders will be in a big trade for sure. This is the
reason a Climatic & Exhaustion Bar is formed at exact tops and bottoms most of the times.
Timeframes
Climatic & Exhaustion Bars are found on all Timeframes. However as a Rule of Thumb, “The Higher
the Timeframe (=> 4-hr TF), the Higher will be the Accuracy as well as the Profitability”.
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Identification
When we come to practical part of trading, it is the identification of a Climatic & Exhaustion Bar
which is the key to success under this way of trading. As per experience and observations, a
Climatic & Exhaustion Bar has three (3) key elements which makes it really powerful as well as
meaningful.
(i) Wide Range Bar (Bar with Long Body)
(ii) Long Wick at the Bottom of the Bar and no or negligible Wick at the Top of the Bar in case of
“Bear Exhaustion Bar” and Long wick at the Top and no or negligible Wick at the Bottom of
the Bar in case of “Bull Exhaustion Bar” (Might have extreme volume); &
(iii) Bar forming at a key support or resistance area including a Round Number (RN) and Big Round
Number (BRN ) that does not have follow-through on the next Bar
Going further, making little modifications to the conservative theory, a Climatic & Exhaustion Bar
need not necessarily have to be at the end of an extended move. It can be at a retest level as well as at
a retracement level. Thus to identify a Climatic & Exhaustion Bar, what we need are the three (3) key
elements as mentioned above and earlier at the beginning of this document.
Trading the Climatic & Exhaustion Bar
- An aggressive trader will make an entry on break of either high or low of the bar following a
Climatic & Exhaustion Bar as the case may be.
- This category of traders will enter in to a position only once price breaks the opening price of the
Climatic & Exhaustion Bar.
- A conservative trader will make entry on Lower Time Frame using re-test, Price Action Bar Patterns
and previous Ultra High Volume Bars on Key Levels.
- An aggressive trader will make an entry immediately on the opening of Bar after the Bar that
confirms no follow-through. (See Below)
- Bar closes somewhat in the middle or so
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1. Bar “A” represents the Climatic & Exhaustion Bar
2. Bar “B” represents a reversal bar, which also confirms NO follow-through
3. Bar “C” represents entry bar (For Aggressive Trader).
Two Scenarios for Entry
Scenario 1: Where the Bar following the Climatic & Exhaustion Bar is an Inside Bar:
The entry is on break of High (For Long) or Low (For Short) of Bar “B”. The stop is below or above
Bar “A” as the case may be.
Scenario 2: When the immediate Bar following the Climatic & Exhaustion Bar breaks
the High (For a Long Position) / Low (For a Short Position) of the Climatic & Exhaustion
Bar:
The entry will be on break of High / Low of the Climatic & Exhaustion Bar.
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Climatic & Exhaustion Reversal Bars:- Real Chart Examples (Very magnificent gains)
Example 1 :- USD/CAD - Daily Timeframe Chart
Example 2 :- USD/JPY - Daily Timeframe Chart
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Example 3 :- USD/JPY - Daily Timeframe Chart
Example 4 :- USD/JPY - Daily Timeframe Chart
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Example 5 :- USDJPY – Daily Timeframe Chart
Climatic & Exhaustion Reversal Bars:- Recent Examples (GBPUSD – 235 Pips on re-test)
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Climatic & Exhaustion Reversal Bars:- Recent Examples
{GBPUSD Rev. Bar Break and Entry on Re-test off 2-hr TF – 200 Pips}
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{GBPNZD 12-hr TF Rev. Bar – 510 Pips in 5 Days}
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{GBPCHF 4-hr TF Rev. Bar – 130 Pips}
{EURJPY Daily TF Rev. Bar – 300 & 155 Pips}
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{EURAUD 4-hr TF Rev. Bar – See Wicks That Confirm Short Entry – 440 Pips}
{GBPCAD Daily TF Rev. Bar – See The Two Reversal Bars}
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{EURCAD 8-TF Rev. Bar – See Pin Bar Entry and Take Profit Area – 250 Pips}
Conclusion:
- This technique can be used on all the timeframes to trade profitably but has success rate on higher
timeframes where the Climatic & Exhaustion Bar is broken and re-test of the break occurs. The
trade is then confirmed with Price Action Bar Pattern or No Demand / No Supply Bars / Test /
Failed Test on Lower Timeframe or on Ultra High Volume Key Levels or CBDRange.
- These Climatic & Exhaustion Bar are all over different timeframes, take your time to look for
them and mark them for future reference.
- Buying climax takes place at market highs while Selling climax takes place at market lows.
- For maximum pips, it is also possible to make multiple entries using Lower Time Frame Climatic
& Exhaustion Bars, in direction of the Higher Time Frame Climatic & Exhaustion Bar.
- [Link]
- [Link]
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