day trading: calling a top

A consistent  day trader more often than not will spend very little time trying to pick tops and bottoms. There are some events that occur however that make it very clear the end of a move has arrived.

Monitoring  price action and volume together, there are instances where a pending turn is obvious. We call this event “exhaustion.” This occurs when a stock has moved very quickly from its average price AND a very large body candle forms AND this is accompanied by a significant increase in volume.

You can see here on this chart a clean exhaustion bar forms with the other criteria. You can use this action in one of two ways, exit a position into momentum before it reverses violently or put on a very agressive trade in the opposite direction, once the shorter term time frame displays a lower high or higher low so that you can manage risk.

In an upcoming article we will explain the mechanics of why “exhaustion” works.