| Updated: September 12, 2025Trading the spike phase of spike plus channel trends
This lesson will cover the following
- Spikes are breakouts
- The cumulative effect
- Spikes in trading ranges
The spike is simply a breakout and should be traded as such. If the breakout appears strong and successful, a trader may enter the market immediately. As this spike can also be viewed as a climax, a pullback may occur at some point. This provides the trader with another opportunity to enter the market in the direction of the trend.
In a strongly trending market a spike may also appear in the opposite direction. If so, this spike may simply lead to a pullback, after which the original trend usually continues. However, if one or two more spikes appear within the following 20 bars, this indicates increasing counter trend pressure and a transition to two-sided trading. The market is then likely to enter a trading range, while a larger retracement, and even a trend reversal, are also possible.
Example
Let us assume a strong uptrend, regardless of its type (if the market remains above the exponential moving average for over 20 bars, this is a sign of strength). Eventually, a medium-sized bear trend bar appears; it opens near its high and closes near its low (a bear spike). This bar can be a bear reversal bar, an inside bar, or an entry bar below a bear reversal bar. This first bear spike usually leads to a bull flag. Next, the uptrend will probably continue and another bear spike may occur. If so, this second spike is likely to be followed by a pullback to the exponential moving average. This pullback to the EMA is usually followed by a test of the uptrend’s high (the test may be a higher high or a double top). Sometimes the pullback to the EMA extends far enough to breach the bull trend line, while the subsequent price surge may prove to be the last surge before a substantial pullback or even a trend reversal.
Cumulative effect
If a third bear spike, larger than the previous two, occurs at the new high, it is possible that at least a two-legged retracement will follow, while the move to the downside after the spike may take the form of a channel. Some traders may believe that the market ignored the first two spikes. That is incorrect; there was in fact a cumulative effect from the previous two spikes.
If the second bear move was exceptionally strong, prices then surged to a new high, and the third bear spike was more moderate but still triggered a retracement, the situation could be interpreted differently. The second bear spike was probably the most important one, and it caused the move to the downside. The surge to the new high after this bear spike was probably a pullback from that spike.
Beginners should note that any pullback after a breakout may test the prior extreme with a higher high, a lower high, or a double top, and the test itself may be the starting point of a bear channel.
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In our case, the third small bear spike may be considered the start of the downtrend, while the channel that follows it may be the first bear channel. However, sometimes the earlier spike is actually the one that has the greater impact on the market. Its channel may begin to develop at the high of the uptrend. The channel after the earlier spike may also begin with the smaller spike (the third spike) down from the high, and the channel following this smaller bear spike may now lie inside the larger channel that started from the high of the uptrend.
Spikes in trading ranges
Sometimes a huge bull trend bar (bull spike) may appear, followed by a large bear trend bar (bear spike). If this occurs during an uptrend that has developed for some time, the market may enter a trading range. Buyers and sellers will then try to overpower each other, with buyers attempting to create a bull channel and sellers attempting to create a bear channel. One side will eventually take control of the market and either the uptrend will continue, or a spike plus channel bear trend will form. The opposite situation can be seen during a downtrend that has developed for a while: first, a large bear trend bar may appear, followed by a large bull trend bar soon afterwards. The market then enters a trading range.
In some cases one side may take control, which appears as a second spike. However, this spike may not extend very far and, after a few bars, a channel in the opposite direction may form.