Today I want to offer you another useful technical analysis tool. It’s a Spike model. It belongs to the category of reversal figures. This means that the appearance of the thorn on the chart can be considered as a signal of a possible trend reversal. Timely entry into the market will allow you to earn well on a profitable trade.
How the spike model is formed
At happens so. There is a downward trend in the market. Then, the price drop intensifies (impulse). After that, there is a sharp change in the direction of movement and the price returns to the level at which the momentum began. On the chart we see a bullish spike.
Bear spike is formed by the same scheme. There is an upward trend in the market. Price increases are increasing. Then there is a sharp change in the direction of movement to the downward one and the price returns to the level at which the growth impulse began.
I want to draw your attention once again to some important points.
The rhythm can only be formed during trend periods. There must be a price impulse in the direction of the trend. After a reversal, the price movement should be as rapid as before. This situation can often be observed after the release of important news. This model works well on small timeframes, i.e. inside the day.And now I suggest you see an example of a thorn:
How to trade when a spikes appear on a chart
Because this is a reversal model, you should trade in the reversal direction.
For entering the market, we are guided by support/resistance levels.
If we see a bullish spike, we use the last minimum that was formed before the beginning of the impulse as an important resistance level. If you like to “tickle your nerves”, you can open a deal right after the price breaks. For those who prefer to trade cautiously, it is better to wait until the price returns to it after a break-down of the level and then moves away from it.
For a bearish spine, the conditions for opening a trading position are the same, but with the appropriate corrections. In this case, we are waiting for the breakthrough of the level held through the last maximum before the beginning of the impulse up.
Starting stops are set slightly higher/lower than the extremum of the thorn. If the deal goes into the plus side, then in time SL should be transferred to a lossless position.
When it comes to fixing the profit, there are different options. For example, you can close a deal in parts, focusing on important losses. It is recommended to close the position at the beginning of the previous trend.
The candlestick sheep modelmay be a good signal to open a trade. However, I would not advise to make a trading decision without confirmation of this signal by other technical analysis tools or fundamental factors.Fyodorov’s Inga03.09.2018