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What is an Exhaustion Signal?
A ChartingCycles Exhaustion Signal is a technical indicator designed to highlight potential reversals or periods of consolidation after a sustained move. The idea is that trends can “run out of participants,” increasing the odds of a pause, mean reversion, or reversal.
How Does the Exhaustion Signal Work?
The Exhaustion Signal is calculated by tracking consecutive qualifying closes and triggering signals at specific thresholds:
Starting Phase (First 9 Counts)
- Compare the current close to the close 4 bars ago.
- If the current close is lower, increment the bullish (buy) count and reset the bearish count to 0.
- If the current close is higher, increment the bearish (sell) count and reset the bullish count to 0.
- If the closes are equal, reset both counts to 0 and immediately recheck to start a new streak if conditions apply.
A Level 1 signal triggers at 9.
Extended Phase (After 9 Counts)
After a Level 1 threshold is reached, the comparison tightens:
- Compare to 3 bars ago while progressing toward 12.
- Then compare to 2 bars ago to reach 14.
Rules remain directionally consistent:
- Bullish streak: increment if the current close is lower than the comparison close.
- Bearish streak: increment if the current close is higher than the comparison close.
- If the condition fails, reset counts to 0 and immediately recheck using the 4-bar comparison to begin a fresh streak.
A Level 2 signal triggers at 12.
A Level 3 signal triggers at 14, after which counts reset to 0.
Win Rate: The percentage of signals where price moves favorably within the best-performing forward window (1–5 candles). For each candle offset (1 through 5), the win rate is calculated across all signals, and the offset with the highest win rate is selected. A bullish win is a higher close than the signal candle’s close; a bearish win is a lower close. Calculated on 30 years (daily), 60 years (weekly), and 90 years (monthly) of historical data.
Median % Move: The median of each signal’s best percent change within the 1–5 candle forward window. For each signal, the best outcome across candles 1–5 is identified independently, then the median is calculated across all signals. This represents the “typical” upside of a signal while reducing distortion from outliers. Note: the backtester dashboard charts show a different view — the median return at each individual candle offset (a fixed holding period), which will typically be lower since it doesn’t select the best candle per signal.
Asterisk (*): Multiple-timeframe continuity — the signal occurs on more than one timeframe within the defined alignment window.
Usage
Exhaustion Signals can help identify areas where a trend may be weakening and price may consolidate or reverse. For best results, combine these signals with broader market context and additional confirmation tools.