A spike appears on the price chart when the price abruptly and sharply moves up or down before turning around. Because the forex market is so volatile and the price starts moving swiftly before changing direction, this behavior is often observed in forex.
This article will Guides you the basic concepts of spikes in forex and how to trade them.
Understanding the concept of spike in forex
Spikes can also occur in less extreme ways, such as when the market responds to unexpected news or occurrences, such as stronger-than-expected profit reports. The name “spike” comes from the archaic custom of pinning finished paper trade order slips to a metal spike.
The idea of spikes being used in a stock’s price is used for technical stoke analysis. Technical analysis studies patterns in share trading volume or how many shares are exchanged daily /monthly. Portfolio managers research these past patterns to forecast future stock price behavior.
How to detect a spike in forex:
A spike is a quick, significant movement on the Forex market caused by an imbalance in liquidity. Most of the time, we may observe similar increases after significant data releases like Non-Farm Payroll (NFP), the ECB Press Conference, the Rate declaration, the FOMC statement, etc.
Due to the banks’ massive orders, we can observe such a rise under regular market circumstances without news. In essence, the price bar that the forex market displays convey the impression that trading was quite active during this time.
What are the causes of Forex spikes?
Spikes are an uncommon phenomenon. Therefore, when it does, there is a valid reason for it that motivates the action. Before taking a course of action, traders should carefully evaluate the circumstance.
The following circumstances can also result in a spike
- A deliberate trend change
- The support or resistance line is not where the price is collected.
- The trend has several holes in it.
- With a sharp surge, the price moves through resistance or support before resuming its previous position.
- Periodic spikes may be a pattern that an asset price follows.
Spike and price gap:
A significant price gap is a difference between the opening and closing prices of the previous day. The close and open of the preceding day or time period are often at different price levels, which causes a gap to occur.
Gaps can also happen during a session in markets with strong volatility. Sharp price rebounding is common in stock and FX trading due to the continually shifting price behavior. That indicates that price is shifting to the opposite of recent significant movements. Continuous price shifting causes spikes in forex trading.
Some strategical Rules to trade the spikes
- Use a 5-minute chart to find the VWAP, and use 20 periods standardize setting.
- Trade the VWAP break on the 5-minute bar that appears after the announcement of the NFP.
- 30 pip stop losses should be used from the VWAP break.
- Exist trading quickly when the 5-minute candle closes.
- The main goal of these strategies is to locate a precise entry point (VWAP) and search for a significant price pulse during the first five minutes after the publication.
How a Trade Is Confirmed Using Spikes
The written record of a securities transaction known as trade confirmation is another instance of the term “spike.” The Exchange Commission and securities (SEC) keeps an eye on how investors are informed about investments. When security is traded, one SEC disclosure obligation is to furnish a trade confirmation.
A summary of the stock and the exchange where the transaction was made are both included in the trade confirmation. The broker verifies the number of units transacted, including the security symbol and the number of shares of stock or bonds purchased or sold.
A spike indicates a quick change in trend caused by significant market news or an occurrence that affects traders’ perception. Traders should not confuse the term spikes with any gap emerging in the trendline.
Moreover, trading in spikes is extremely risky and can be deceiving even for professional traders. One must understand candlestick patterns to respond to spike candlestick patterns and to avoid taking misleading signals seriously.
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