ZoneTraderPro

The ZoneTraderPro Exhaustion Trade

The next part of the trading plan that must be addressed is the high risk trend trade. The reason this pattern is so successful is because the high risk trend trade is so risky. But there are high risk trend trades that succeed. When a high risk trend trade succeeds, you will only have 5-6 ticks of profit. Does your trading plan take 6 ticks of profit and call it a day? Or do you hold out for 8 ticks or more?

Probably the best way to answer the real time trading decision is to use the ZoneTraderPro TICK strategy. As in the above example, if the TICK was to exceeded by 100 or more on the up move, taking profits at 5 ticks would make sense. If the TICK was exceeded by 100 or more, your decision could be to hold your target and adjust your stop.

Moving The Stop

The next piece of the trading plan puzzle is when you move a stop, and where you move it to. The definition of a breakeven trade is when the market moves 4 or 5 ticks in your favor from the previous high/low. You now have a reference point for where the market found support or resistance. Now that you have that reference point, you know what price should not be broken.

In these two examples, once the price was broken from where the original support was found, you did not want to be part of the trade. Only about 5% of the trades exhibit this as a problem, so it is not a common issue, but you must be prepared if it does occur.

Where should the stop be moved to? There are several examples where the market will test once or twice the previous price found as support or resistance.

It is also possible that the market will stop run the previously set high or low. So if your stop is 2 ticks from the previous reference high or low you would avoid being stopped out on a stop run. NinjaTrader has a simulated stop that would allow you to place your stop 1 tick away and not get stopped out on most stop runs.

The last piece of the trading plan puzzle is what to do if the market gives you an exhaustion trade and immediately is followed up by another exhaustion trade in the same before your profit target has been taken.

This is an even better example. After you enter the trade and have 4 ticks of profit, the market reverses from minor, trades back to the original high, and another exhaustion trade is indicated. In both of these examples, if you moved your stop and accepted more risk, the trade did successfully complete. There is currently no example of a loss from moving the stop, and the second trade is stopped out.

How would you solve the problem as the situation occurs in real time? The ZoneTraderPro TICK strategy is a pretty good answer. Notice on the trade below that on the second move the TICK can only get to 645, and the previous high was 981. There are not enough buyers to sustain the bullish move and the exhaustion trade succeeds. Note: In the statistics, this was treated as one trade, since there the TICK strategy rules were not violated.

Breaking News

Trading this pattern during news that has just been released should be avoided. When news has broken, there are large institutional traders that will need to accomplish trades based on the news. During this period, the markets will enter strong trends. When a strong trend is entered, there may be several exhaustion trades that occur, most will fail, until the markets' price finds its new value.

As demonstrated below, exhaustion trades will normally mark highs and lows, unless the market is reacting to news. Here we have a short exhaustion trade at the high, followed by bad news, and a very strong bearish move. The tick filter will filter approximately 50% of these losing trades, but if the market is in a strong trend, the tick filter will not always prevent a bad trade.

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