How to Explain a Spike in Your Chart? Definition & Trading Strategy

A spike chart is a very unique phenomenon in trading that refers to huge upward or downward movements of prices on charts in a very short period. In other words, a large and sudden upward or downward movement of price. Experienced traders use spike charts to make crucial trading decisions. 

Do you also want to learn all about the spike charts and how to trade them? Then you are in the right place at the right time. Because we are going to explain them in a very simple and easy way. Let’s start right away!

Spike chart definition

A spike chart means when the price of a financial instrument suddenly rises or declines in a very short period. It occurs because of news or new information that leads a huge number of investors to enter the market.

Spike chart explained

As you know, knowledge is power. Therefore, whenever investors come to know about news or new information, they act quickly. They hope to beat the market by acting really quickly. This mentality leads to the huge volume and that volume causes prices to go up or down in no time. This is a spike chart. So, there are two types of activities that cause spike charts;

• Good news or something else substantially increases interest in a particular instrument and causes unusual volume
• Bad news or something else substantially decreases interest in a particular instrument and causes unusual volume

Both of these situations will cause a spike on charts. In the first case, the price of that security will rise significantly in no time. On the other hand, the second situation will lead to a sudden downfall in prices in no time. 

Spike chart trading strategy

Experienced traders and technical analysts always consider price trading ranges and long-term trends of financial instruments. They make decisions by looking at multiple factors. However, price trading range and long-term trend are two key factors. Now, let’s see how you can trade the spike chart.

Suppose that a particular stock is currently trading at $45. It has had a price range between $30 to $45 during the past 12 months. Now, if the price suddenly moves above $45 or moves below $30, what does it mean? It means there is a spike chart and you need to act before it gets too late. 

Assume that the spike is downward and the stock price is heading below $30. What will you do in such a situation? It is quite obvious. You will sell your stock and exit the market. So, a sudden downward spike is a sell signal. Conversely, if the spike is upward and the stock price is heading above $45. What will you do in this situation? Again, it is quite obvious. You will buy stock and enter the market. So, a sudden upward spike is a buy signal. You see, the spike chart strategy is pretty simple.

Cautions

Spike chart strategy is pretty simple and anyone can follow it. However, it is also important to determine whether the spike is caused by a large volume or just a single big trade. For example, a single trade by a large financial institution may also cause prices to go up or down suddenly. Secondly, you should also be careful when volume generally gets lower such as on weekends and activity remains low. Low activities don’t necessarily mean a downward spike chart.