What Is the Exhausted Selling Model?

The exhausted selling model is a technique used to estimate when a period of d💝eclining prices for a security has reached its end—or when sellers have exhauste♛d their ability to sell any further. It is employed by investors who seek to profit from a turnaround following a period of intense selling pressure.

Exhaustion occurs when almost everyone who wants to be long or short already is, leaving very few people 🦄to support or continue pushing the price in the current direction.

Understanding the Exhausted Selling Model

The exhausted selling model is well-suited for periods following unusually intense selling, otherwise known as 澳洲幸运5官方开奖结果体彩网:panic selling. In these situations, 澳洲幸运5官方开奖结果体彩网:contrarian investors can profit by "澳洲幸运5官方开奖结果体彩网:buying the dips" at unusually low prices.

Panic selling can be described as the rapid sell-off of a security based on short-term events that are not clearly connected to the 澳洲幸运5官方开奖结果体彩网:intrinsic value of that security. For example, a stock might face panic selling in response to a negative rumor from an ongoing legal battle. At times, panic selling can produce p♔rice declines that are far more severe than warranted by the news item that triggered the panic.

In these situations, the exhausted selling model can help contrarian investors to assess when the decline in price is likely to reach its lowest point. To accomplish this, it uses information regarding 澳洲幸运5官方开奖结果体彩网:trading volume, moving average price history, and certain chart patterns to detect when a positive turnaround might be approaching. Because it is principally based on price chart information, the exhausted selling model is generally used by traders who follow a 澳洲幸运5官方开奖结果体彩网:technical analysis approach to trading.

Special Considerations

Although different investors might use modified versions of the exhausted selling model, mo♛st versions involve the following guidelines:

• First, the security in question must have recently declined based on unusually high trading volume.
• Second, there must be recent evidence of buying pressure (following the decline), such as a bullish engulfing pattern or any type of bullish chart pattern within the price or in a technical indicator.
• Third, the stock tests a support area, such as an important 澳洲幸运5官方开奖结果体彩网:moving average (MA) or a price where the security bounced off on prior declines, signaling a base of demand from buyers.

If all of these factors 🍌are in place, the exhausted selling model would predict that the stock has reached its low point in pr💛ice and that a positive reversal will soon take place.

As indicated, these are general guidelines, and individual traders may trade variations of this model using technical tools of their preference. Once a trader buys based on the alignment of the guidelines, a 澳洲幸运5官方开奖结果体彩网:stop-loss order can be placed below the recent 澳洲幸运5官方开奖结果体彩网:swing low in order to control risk.

Example of the Exhausted Selling Model

The following daily chart of ROKU Inc. (ROKU) shows a significant uptrend followed by a sharp, high-volume price decline.

🥀A trader utilizing an exhausted selling approach would have noted the high volume and sharp selloff. They would have then looked for ev꧑idence of buying pressure, potentially near some support level.

In this case, the price declines into a support area based on a prior swing low. The price also d😼ropped below the 100-day moving average—which some trade✅rs view as important—and then moved back above.

In terms of a bullish 澳洲幸运5官方开奖结果体彩网:candlestick pattern or chart pattern, the price formed a small 澳洲幸运5官方开奖结果体彩网:cup and handle pattern near support. The price broke out of the pattern to the upside, indicating a move higher. A few days prior to the cup-and-handle breakout, the 澳洲幸运5官方开奖结果体彩网:stochastic oscillator made a bullish crossover in oversold territory.

A stop-loss order could be placed below the cup-and-handle (or below the swing low) once🌳 a trade has been ente𒅌red. This helps control the risk in the event the price continues to decline.

Exhausted Selling Model vs. Catching a F🔜alling Knife

The exhausted selling model is used to buy securities whose price has fallen but also exhibits positive technical characteristics of a bounce. This is distinct from 澳洲幸运5官方开奖结果体彩网:catching a falling knife, a colloquial term for buying a sell-off without studying technical indicators. This can be more dangerous if the security has not shown signs of stabilization or 澳洲幸运5官方开奖结果体彩网:accumulation.

Limitations of the Exhausted Selling Model

When the price is falling, it may continue to fall even if the guidelines of the exhausted selling model are met. There may be a dead cat bounce, as traders attempt to buy the dip, before prices continue t🔥o fall. A large decline doesn't necessarily mean a security is worth purchasing at thౠe current price. In many cases, these drops occur due to fundamental reasons and market conditions.

The model itself doesn't predict how far the price will bounce or for how long. It is up to the trader to determine when to exit profitable trades. Risk can potentially be limited with a stop-loss, but in fast-moving market conditions, the stop-loss may be subject to slippage, resulting in a larger loss than anticipated.