Candlesticks patterns are rather popular. These are easy to understand bar formations in the charts that pack a lot of information in every single candle, like opening and closing prices, and the higher and lower limits the price travelled during the day. This article will discuss spike candlestick, which is a unique formation but offers decent trading opportunities.
As the name suggests, it forms a peak in the trendline where price makes a significant movement before settling back to the initial range. Spike candlestick definition describes it as a sudden rise or dip in the trendline caused by a momentary change in market sentiment.
A spike pattern can appear in both uptrend and downtrend, followed by sudden moves by traders.
How To Recognize A Spike
Spike candlestick refers to an erratic rise in price, usually caused by new information coming into the market. The price breaks the previous trend to shoot high during the day but closes near the previous range. Once the initial impulse precipitates, a reversal candle forms after the spike candle, followed by more candles forming in the line of the initial price level.
A famous example of a spike is when Dow Jones plunged 22 percent in one day during the stock market crash in 1987.
You can see the opposite scene playing out when a spike appears in a downtrend. The spike opens at a much lower price but ultimately close near the preceding candles. After a significant dip in the stock price, represented by the spike, the following candles form along the existing price line. Traders can notice a Hammer, Harami or invested Hammer pattern appearing after the downtrend spike candlestick pattern.
Spikes are a result of sudden sentiment changes in traders, triggered by greed or fear or panic. Major market news can sway traders’ perspective and cause a sudden surge in entry or exit in the market. A sudden rise in demand will push the stock price sky high, before the traders panic and start to sell off their holding, pushing the price down to the original level.
A spike can appear when a large player enters the market. It causes a major change in market volume.When there is a big demand for a stock in the market, traders will rush to fill the gap with more applications, returning the quotation to the initial level.
How To Interpret Spike
Spikes are rare occurrences. So,when it appears, there is usually a good cause behind it to trigger the move. Traders need to investigatethe situationcarefully before deciding on an action.
Additional conditions that can cause a spike are the following
- A directed move in the trend
- Price isn’t accumulating near the support or resistance line
- There are lots of gaps in the trend
- Price breaks away from resistance or support with a quick impulse before returning to the original level
- Period spikes could be a pattern of followed by an asset price
Trading in spikes involves high risks. As a word of caution, traders must carefully place stop-loss and take profit limits before entering a position.
In a situation when there is a significant leap in the price, one can open a selling position at the opening of the returning candle, using the high of the spike to place the stop-loss limit. A take profit limit is placed at equidistance after measuring the SL.
Conversely, when a spike appears in a downtrend, traders open a buying position at the first bullish candle opening after the spike.
The Bottom Line
Spike represents a sudden move in trend when major market news or incident sways traders’ sentiment. One mustn’t, however, confuse it with a gap that appears in the trendline. Trading in spike involves high risk and can trick even experienced traders. To react to spike candlestick pattern, one must master candlestick patterns and avoid falling for false signals.