What is a spike in technical analysis?
-
amir
- Blog
Introduction:
Technical analysis provides investors with a wide range of trading opportunities. Achieving profit using technical analysis requires predicting price movement based on historical trends and patterns. One of the popular patterns of technical analysis is the spike pattern. In this article, we will first talk about the spike pattern and how to recognize it, and at the end, we will explain the trading strategy when the spike is formed.
What is a spike pattern?
A spike is a fairly common pattern in technical analysis. For the first time, an experienced trader and famous author of financial books, Jack D. Schwager, proposed the term spike. His reasoning was that spikes appear because of market participants’ extreme anxiety or sudden actions. In fact, a spike can be described as a sudden increase or decrease in price, caused by a momentary change in market sentiment.
Spike model structure
Spike refers to reversal patterns and consists of two opposing impulses. During the formation of this pattern, the price starts an upward or downward movement depending on the current trend and then reverses in the opposite direction. On the diagram, this pattern looks like the letter V.
Types of spike patterns
The spike pattern is of two types:
Bearish spike: This pattern is shown by an upward movement followed by a sharp drop in price. In this case, the pattern resembles an inverted V.
Bullish Spike: This pattern is just the opposite of the previous pattern. Here, we have a strong bearish move followed by an upward pullback.
Typically, a spike forms after a very strong trend; Just when one of the parties (buyers or sellers) is trying their best to break through an important support or resistance level. When there is insufficient effort from buyers (bulls) or sellers (bears), the price reverses sharply, completing the spike pattern.
Other conditions that may cause a spike include:
- A directional movement in the process
- There are many gaps in the trend
- Price breaking away from support or resistance with a quick move, before returning to the initial level
- The price does not accumulate near the resistance or support line.
Features of Spike
Spike’s features include the following:
- There is no fixation point above the spike pattern. In other words, the price does not fluctuate at the top of the pattern and forms a sharp angle.
- A spike is often an opportunity to make high profits; Because its peak height can reach 100 and even higher. With all this, the spike risk is also very high.
- On shorter timeframes, spikes are around 5-10 pips, creating trading opportunities for traders with high trading frequency.
How to identify a spike pattern
Although a spike often appears on charts, it is not easily recognized. The following methods can help:
1. A spike is usually part of another pattern. For example, a spike can be part of a head and shoulders pattern, a double bottom pattern, or a double top pattern. As a general rule, most of the time the spike is identified after the rest of these patterns have started to form. As a result, it doesn’t matter if you can’t recognize it; Because all these patterns include pullback, which if you act on time, you will increase your profit.
2. In general, spikes are easier to spot on a line chart than on any other chart.
3. In a candlestick chart, a spike is often formed by a large bullish or bearish candle. After it is closed, pullback starts.
Trading strategy for spike
First of all, you should know that trading on spikes is associated with high risk; Just like all strategies that seem to bring rich profits. During the formation of this pattern, the market situation moves very quickly. For this reason, the decisions you make must be made lightning fast. This shows that you should use automated tools in your trading strategy.
What is very important is to recognize the exact moment of market trend reversal in order to achieve maximum profit. As soon as the second side of the spike pattern begins to form, you should open a short (sell) position if the spike is bearish, and a long (buy) position if the spike is bullish.
You need to quickly set the exit points and determine the lot size. You should enter the trade only if you include the rules of risk management in your strategy and follow them quickly and carefully. Otherwise, you will face irreparable losses.
The fastest way to predict the spike pattern is to use reverse candlestick patterns such as engulfing candlestick pattern, Doji candlestick pattern, belt hold candlestick pattern and so on. Spike can be formed without these patterns; But when observed simultaneously with them, the signal will be stronger. It is difficult to identify this pattern in the stage of infinite formation; But as it often happens in the market, you can quickly spot the top over time thanks to the candlestick patterns we discussed.
If you ever notice a spike that has already formed its second part, you should not enter into the transaction; Because the possibility of a pullback in the opposite direction is very high and this happens in a short period of time. The risks in this stage of pattern formation are very severe and more than the risk-reward ratio. After the formation of any candle during the pullback, the probability of profitability decreases significantly.
Frequently asked questions
1. Who is trading on Spike suitable for?
A spike is a fairly common pattern in forex, but it’s not for everyone. Before trading for spikes you need to decide what kind of trader you are. If you are a beginner or prefer medium risk, this position is not for you.
2. How to interpret the spike?
To identify and interpret a spike, you must first thoroughly study and master candlestick charts. Also, many traders see false signals especially when the market is relatively calm before the spike. These conditions can be dangerous for beginner traders.
3. When does Spike appear?
A candlestick spike pattern is often the result of a failed attempt to continue an existing trend. Spikes usually occur due to strong emotions in the market and therefore, great caution should be exercised before entering into trades in these conditions.
https://www.fxclearing.com/blog/spike
https://www.angelone.in/knowledge-center/share-market/spike/candlestick/pattern
