Hi,
During trading today I realized that my playbook is missing a play: positive price spikes when you are already in the trade. I couldn’t find a place in your book or your website where you talk about this. I’m wondering if you can offer some analysis.
Attached are some one- and five-minute charts (I was trading off the five minute and didn’t have a one minute up at the time of trading).
I’m not sure what I should have been thinking during the spike, but what I thought was “I don’t want to give this back” 🙂
Questions:
1) What is the basic play on a spike like this?
2) Where would you have re-entered the trade after the spike?
I’ve re-read your book several times and keep getting something out of it, thanks again!
@MikeBellafiore
Great question worth a detailed discussion!
There are different spikes to consider. Some are: 1) Low-volume spike, 2) overly vertical spike, 3) high-volume spike, 4) spike after consolidation. There are more subsets but you get the point.
I would categorize this as a spike after consolidation. More specifically this is a high-volume spike after consolidation. Even more specifically this is a high-volume spike after consolidation that reverses a downtrend. There is a high probability that this spike indicates a trend forming that you will want to follow.
It appears you found some bottoming action and then got long. After the intraday bottoming action there is a hold higher in the market. This failure to make a new low and then holding higher is the pattern we teach our trainees for a reversal or bounce.
So the market is just sitting there consolidating at this holding higher level. I would be expecting and anticipating the market to bust higher. This would be why I was long. So this spike would be confirmation that our reversal pattern was correctly identified.
First, I would check for any news. If some bogus news was announced this may have been the cause for the spike and exiting may be the best choice. But this seems unlikely in your set up. Second, I would start to look for trades to add more size responsibly. Our favorite pattern would be consolidation at these higher levels. I would be holding for a trend trade and need a Reason2Sell for me to exit.
I hope that helps. Keep working on your trading game.
You can be better tomorrow than you are today!
Mike Bellafiore
