Home/Blogs/Interpreting Spike Candlestick Pattern

Interpreting Spike Candlestick Pattern

Introduction:

Candlestick patterns are essential tools for technical analysis of the stock markets. They provide valuable insights into market sentiments and potential price reversals. One such pattern that stands out for its significance and distinct appearance is the spike candlestick pattern.

In this article, you will delve into the world of spike candlesticks, exploring what they signify, how to interpret them, and how you can use them to make informed trading decisions.

Open Your free Demat Account in just 5 minutes!

Understanding a candlestick

Before delving into the details of the spike candlestick pattern, you must know what a candlestick is. It is a method of displaying information regarding a stock’s price movements. The candlesticks are displayed on a chart, with red candlesticks indicating downtrends and green candlesticks representing uptrends.

A candlestick has three distinct features:

  • The body, which represents the range
  • The wick, which represents the high and low points during a period, and,
  • The colour, which represents the direction in which a stock is moving

What is a spike candlestick pattern?

The spike candlestick pattern is a distinct single-candle pattern characterised by an exceptionally long wick and a minimal or non-existent body. This pattern can appear in both bullish (upward) and bearish (downward) market conditions and typically signifies a sharp and sudden change in investor sentiments.

A trend reversal pattern usually follows the spike candlestick pattern. It’s because once the accrued momentum in a stock dies down, a trend reversal occurs in the line of the initial price level.

Some common reasons that can lead to the formation of a spike candlestick pattern:

  • Investors square off their positions on a large scale due to panic or fear
  • A major market news that can directly or indirectly impact the company’s business
  • Uncontrolled movement above or below the trendline
  • Multiple gaps in the price trendline
  • Breakage of support or resistance levels with a quick impulse
  • Sharp swings in prices by the trend or against it

How to recognise and interpret a spike candlestick pattern?

Here’s how you can recognise and interpret the spike candlestick pattern:

Bullish Spike

A bullish spike candlestick pattern forms when the opening and closing prices are nearly the same (resulting in a tiny body), but the wick extends significantly higher. This suggests that the price dropped substantially during the trading period before buyers stepped in, pushing the price back up. It can be seen as a bullish reversal signal, indicating potential upward momentum.

Interpretation:

The long upper wick signifies strong buying pressure. It suggests that bears attempted to lower the price but were overwhelmed by bullish sentiments. You use this pattern as a buy signal, anticipating a price reversal to the upside

Bearish spike

Conversely, a bearish spike candlestick pattern forms when the opening and closing prices are very close, with a long lower wick extending significantly downward. This pattern indicates that the price surged downward during the trading period but was met with strong buying interest that pushed it back up. It is considered a bearish reversal signal, hinting at potential downward momentum.

Interpretation:

The long lower wick represents strong buying interest after a sharp price decline. It suggests that bulls attempted to increase the price but were met with overwhelming bearish sentiment. You can interpret this pattern as a sell signal, anticipating a price reversal to the downside

How do you use spike candlestick patterns for trading?

Now let’s explore how you can use a candlestick pattern to trade effectively:

  • Determine entry and exit points

When a spike candlestick pattern coincides with other technical indicators, it can offer a strong entry point. For example, if a bullish spike appears at a key support level, entering a long position may be an opportune moment.

  • Stop loss and risk management

Stock markets are prone to high volatility. Hence, implementing risk-management strategies like a stop loss is crucial. Consider placing stop-loss orders just below the low of a bullish spike or just above the high of a bearish spike to limit potential losses if the trade goes against you.

  • Volume analysis

Volume analysis alongside spike candlestick patterns can provide additional confirmation of a trade. An increase in the trading volume during the formation of a spike can indicate strong market sentiment and enhance the pattern's reliability.

To conclude

Spike candlestick patterns can help you interpret market sentiments and identify potential profit-making points. However, you should always use them with other technical analysis tools and implement risk management strategies to mitigate potential losses.

 

Related Articles:  What is a Death Cross | Everything You Need to Know About Risk Management | Understanding Dividend Payout Ratio

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

You may also like…

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Partner with us
Become a Partner