Let's find out how to find the spike on a chart, as well as how and who should trade it.
The Structure of the Model
Spike refers to reversal patterns. It consists of two opposite impulses. The price has an ascending or a descending momentum, depending on the current trend, and then rolls back in the opposite direction. On the chart, the pattern resembles a narrow “V” letter.
There are two types of pattern:
- Bearish spike. This model is represented by a bullish momentum followed by a sharp decline. This pattern looks like an inverted "V".
- The bullish spike is the opposite of the previous one. Here, sharp bearish momentum is followed by a clear upward pullback.
Types of Spike
Typically, the spike forms after a very strong trend when one of the parties makes every effort to break through an important support or resistance level. When the efforts of bulls or bears are not enough, the price reverses sharply and forms our pattern.
Features of Spike
- There is no consolidation at the top of the spike. In other words, the price doesn’t fluctuate between the formation of the two sides of the pattern and forms an acute angle.
- The spike often gives a chance for high earnings, since its height can reach 100 points or more.
- On lower timeframes, the spikes are around 5-10 pips and create trading opportunities for high-frequency traders.
How to Identify a Spike
Despite the fact that the spike quite often appears on charts, it can be very difficult to identify:
- The spike is often a part of another pattern - head and shoulders, double bottom, or double top. As a rule, this can be determined after the beginning of the formation of the rest of these patterns. However, this should not be a problem, since all these patterns include pullbacks on which you should timely raise your profits.
- The spike is most easily identified on a line chart.
- On a candlestick chart, the top of the spike is often formed by a large impulse candle (bullish or bearish). The pullback begins after its closure.
Spike on Chart
Trading Strategy for Spike
I would like to note right away that trading on spikes carries high risks, just like any strategy that involves tangible profits. During the formation of this pattern, the market situation develops very quickly. You will have to make lightning-fast decisions that need to be brought to automatism.
It’s important to catch the exact moment of market reversal for maximum profit. As soon as the formation of the second side of the spike has begun, you need to open a short trade for a bearish spike and long trade for a bullish one.
You need to quickly set exit points and determine your lot size. Enter the trade during spike formation only if you follow all the rules of your risk management system quickly and accurately.
The fastest way to predict the appearance of a spike is the usage of reversal candlestick patterns, such as engulfing, Doji, belt hold, and others. The spike can form without these patterns but with them, the signal will be stronger. It is extremely difficult to identify this pattern during the formation phase but it is quite common in the market. Over time, you will be able to pinpoint its top quite quickly thanks to the mentioned candlestick patterns.
If you notice a spike when most of its second side has already formed, you shouldn’t enter the trade, since there is a high possibility of a pullback in the opposite direction in the nearest terms. The risks at this stage are too high and out of risk-to-reward ratio. The potential profits are significantly reduced after the formation of each candlestick during the pullback.
The spike is a fairly common pattern in Forex but it doesn't suit everyone. Before you can trade this pattern, you need to decide what type of trader you are - risky or consistent. If you are willing to do anything for high profits, then spike is a great trading opportunity for you. If you are still a beginner or prefer moderate risks, then you should give preference to other more reliable figures.