Sometimes the price goes up or down very strongly and suddenly and then turns around, and so it forms a spike on the price chart. This phenomenon can 99% be seen on the Forex market because it is a too volatile market, and the price starts moving strongly very fast and then it changes it direction. These strong movements form because of the sudden huge transactions that are triggered at the same time based on an economic event like an important news. For example, a sudden and unexpected change in the interest rate of a currency. Such movements and spikes and can be the subject of a kind of trading style which is called Forex Spike Trading.
You can’t see such movements and spikes on the stock market because stocks can’t be affected by the economic news and events suddenly. They change gradually. And also it is not easy to make an unlimited number of transactions, buying or selling, on the stock market suddenly, because stock market is limited and sometimes there is no buyer for a seller at any time and visa versa. Therefore, stock market rarely forms price spikes.
Forex spike traders wait for the price spikes to form on the charts to enter the market, because they believe (1) spike trading is more profitable, and (2) there is a stronger guarantee of making profit.
I tell you how you can do that, but the first and most important Forex Spike Trading rule you have to keep in mind religiously is that the strong price spikes form on the charts when the market becomes extremely volatile, and for examples it moves hundreds or even thousands of pips in one day (I will show you the examples). Under such a condition, it is so easy to wipe our your account specially if your account is leveraged (you don’t wipe our your account if you trade with a non-leveraged account or through a bank account which is not leveraged usually).
A sudden and too strong movement can blow up your account within a few minutes, specially because these price strong movements are some great chances for the market maker brokers to make the clients accounts wiped out. Keep in mind that you can’t get out so easily under such a condition, either because the broker doesn’t allow you to do that by freezing the platform, or even when your broker is a true and real ECN/STP, the liquid providers can’t execute the orders on time because of the order overloads and receiving too many orders at the same time.
So you have to be very careful about the strong price movements and the spike trading. Even if you want to do that, you’d better to have a separate account for this purpose and have a portion of your capital in it, not to wipe out all your money. You should also limit your greed and take too small positions, so that you don’t get margin call so easily. You should also lower your account leverage as much as possible.
Additionally, I strongly recommend you to use the longer time frames like daily, weekly and monthly to trade the price spikes, and avoid using the shorter time frames and entering the markets through these time frames while the price is still moving very strongly and hasn’t calm down yet. The reason is that, when the price is moving strongly and you are trying to enter the market as a day trader, your order won’t be executed where the price is when you hit the buy or sell button. Your order will stay in a line waiting for execution, and by the time it is your order’s turn to get executed, the price has changed a lot and you enter with a too big difference. However, if you wait for the market to calm down and form the spike on a longer time frame like daily or weekly or even monthly, you can easily enter at your desired price. This is also a very important tip in trading the price spikes on the Forex market.
These are the most important Forex spike trading rules that you have to keep in mind if you want to trade the price spike, otherwise you can lose your shirt on the too volatile Forex market.
How to Trade the Price Spikes on the Forex Market
Now, I show you some examples of the price spikes on the Forex market and will tell you how you can trade them properly.
The below chart, shows two instances of the price spikes on USD/CHF weekly chart. There are some important fundamental and economic reasons behind each of them, but they don’t matter here because here we are looking for the technical aspect of the trading of the price spikes on the currency market.
As you can see with both of the price spikes, they are completely VISIBLE, OUTSTANDING and STRONG compared to the other parts of the chart and the other candlesticks. So, it is not that hard to find the spikes on the chart. You have to wait for these kinds of visible, outstanding and strong spikes to form on the longer time frames to enter the Forex market. There is no doubt that they don’t form on the charts every day, week or even month, and you have to wait for them for a long time to form. However, they are so profitable and your patience will get paid if you wait for them, because you can make thousands of pips through one single trade setup if you use the longer time frames to enter and you are patient enough.
The too strong and long shadow of the candlestick that forms the spike and also the too strong Bollinger Bands breakouts, are the other features of the price spikes. It is what you can’t ignore and is absolutely visible on the price charts. Indeed, the name “spike” is because of the shadow of the candlestick that forms the price spike trade setup.
One of the most important point is that you should NOT get stressed and enter the market when the price has turned around and is forming the candlestick shadow. When you see the price has turned around, you can get stressed out and think that you are losing a lot of profit that can be in your pocket, and so you enter the market too early. This is a big mistake because the price still can turn around again and follows the same direction. You HAVE TO wait for the candlestick to close to enter the market, otherwise you will be in trouble. This is another important spike trading rule on the Forex market.
It is not only that. You’d better to wait for the confirmation candlestick as well. If the next candlestick closes with a the opposite body color, it means the too strong movement is really reversed and it is time to enter the market and make money. Surely you will have to leave hundreds of pips on the table if you wait for the candlesticks to close, but that is the profit you have to ignore if you want to have a safe and profitable trade.
So, you wait for the spike candlestick and then the next candlestick to close. In case (1) the spike candlestick forms a too long shadow which is a lot longer and bigger than all the other candlesticks and their shadows on the chart, and, (2) the shadow or even the candlestick body have strongly broken out of the related Bollinger Band (lower band in case of the long trade setup and upper band in case of the short trade setup), and (3) the confirmation candlestick also confirms the candlestick spike, then you can enter the market. This is the easiest and safest Forex Spike Trading method.
Here is another example (below). The one at the left is the example of the spike which is not that strong. The middle one is the example of the spike that didn’t work very well. The third one at the right is still doing good. The important lesson that the below chart teaches is about the time frame. Weekly and monthly time frames are the best time frames to filter out the week price spikes on the Forex market. You will get in because of the weaker spikes on the shorter time frames line daily.
The below chart tells us another important thing about trading the spikes on the Forex market:
1) You have to be patient enough to hold your position for several candlesticks (weeks or months).
2) You have to have a proper money management plan to take care of the profit you have made, otherwise you can lose all the profit when the market turns around. You can take a few positions and close them in turn to collect some profit and then move the stop loss further for the open positions. This is a good strategy to save your profit.
To have a better exit, you can use the tools like Fibonacci extensions. The below chart is the exactly the above one, but I have applied the Fibonacci levels on it. It shows the importance of the 161.80% and 261.80% levels in collecting the profit and exiting the market on time, specially with the left spike: