Trading spikes in
any time frame can be a very high probability
trade with low risk relative to reward if our
unique set up is followed. Spikes fall under
exhaust patterns and signal that the market is
ready to reverse.
Traditionally the
spike or ''V pattern'' as it is sometimes known
will reverse very quickly and is difficult to
trade because by the time you identify that it
is a Spike it is normally to late.
The type of
Spikes we will trade will allow us sufficient
time to identify the pattern and enter the
market with relatively low risk. This requires
some patience to let the pattern develop but it
will be worth it once you see the results.
As with all
trades the first thing you are going to do is
figure out where you will get out of the trade
before you put the trade on. You must always
have some kind of money management in place when
trading.
If you refer to
the charts below you will see that there is 4
parts to the spike trade. At point 1 you may or
may not see an extended trading range. At point
two you may have identified the pattern as a
spike. We however wait to confirm that we have a
spike until we see the retracement to point 3.
This is the set up and we are now ready to
trade.
The breakout
happens at point 4. Once we have identified that
we have a spike at point 3 we place a sell stop
order just below point 4. As soon as the order
is hit at point 4 we place our stop loss order
just above point 3. This immediately limits your
risk. The reverse is true for long trades.
The minimum
target I would expect to see would be the
distance from point 2 to point 3 extended up or
down depending on the direction you are trading.
If traded in this manner you can expect as high
75% winners.
You will also
notice that this type of trade tends to work
quickly. If it is taking a long time to get
going (more than three or four bars) after you
have entered at point 4 you may wish to lock in
any profits and close the trade. Another
technique you cam employ is to use a trailing
stop and at the first sign that the market might
reverse, you can close the position.
