Trading Spike Bars with Key Support and Resistance

This post will outline the characteristics of spike bars and how to distinguish between a high and average probability spike bar setups. Specifically, we’ll look at how to trade spike bars together with key support and resistance levels. The spike bar pattern is an effective tool for identifying reversals and is part of our new tool, the Auction Bars indicator.

Characteristics of Spike Bars

First of all, a spike bar is made up of a small body with a long shadow. Therefore, they’re easy to identify on charts and a lot of traders will pull the trigger when they see this pattern. Why? Because, as the old norse saying goes; “A spike that sticks out is very likely to get hit by a hammer.”

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Basically, a spike bar tells us that prices were rejected at at certain level, and that the market pushed back to where the candle opened. If the patterns occurs at the end of a move, we can assume that momentum is out of steam, and that it could reverse.

Although easy to spot visually, we need to define the requirements for being a spike bar. In addition to having a small body and long shadow, a spike bar should:

  • have a body which is at one end of the range, not in the middle
  • have a significant range (average or above average)
  • plot a significant volume (average or above average)
  • mark a higher high / lower low than the last of N bars

Below is a good example of a spike bar (blue). The shadow is much larger than the body, which is small and closing at the upper end of the range. Furthermore, we see that this bar has just made a new low, compared to the previous bars.

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Trading Spike Bars

The difference between high and average probability spikes will depend on the characteristics listed above. A spike bar that closes at one extreme end of its range, has a higher probability of being profitable than one closing in the middle.

Next, we’ll want to establish whether the market is trending or is ranging. Knowing this will help us understand what’s going on with the market and how to position ourselves. Spike bars that form with the trend have a higher probability of being profitable. However, we will also look for potential setups in ranging markets and at trend reversals.

In the chart below, the horizontal lines show us a higher timeframe trading range (the high and low points during the last 60 minutes). This is what we call the auction range. The idea is that the market is ranging 80% of the time, and then, suddenly there‘ll be a breakout, with a close outside the range.

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As can be seen here, a bullish spike bar formed at the lower end of the higher timeframe range and then, the market broke out of this range, creating a new 60 minutes range above the previous one.  A bearish spike then other formed at the upper area of the range and the market retraced back towards the mid range.

In the next chart we see a spike bar at daily floor pivot level. The pivot range is green because yesterday’s regular session closed next to the daily high level. The spike bar forming at daily pivot signals that lower prices are being rejected and that yesterday’s bullish trend will try to expand.

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As seen above, we’ll want to trade spike bars in areas of key support and resistance levels. Other than session pivots and higher timeframe range levels, we can also use the volume weighted average price (VWAP) as a benchmark.

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Session pivots, higher timeframe ranges and VWAP levels are all objective price benchmarks that work as meeting points between buyers and sellers. Identifying spike setups at these levels will improve our odds, because market participants are likely to “respect” these objective and well established price benchmarks. 

As we’ve seen, the spike pattern is easy to spot. By adding pivot, VWAP and higher timeframe ranges, we ensure that other uncorrelated market conditions support the setup. The more conditions point in our favor, the better our odds will be.

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Trade entry and stop loss

The relation between our entry and the stop-loss determines the risk we’ll take on the trade. This needs to be accepted and well understood before entering the trade. The entry for spike bars will typically be a sell- or buy stop order just above/below of where the body is located. The stop loss is placed right above or below the candle’s shadow.

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To sum it all up, spike bars are useful for locating favorable trade setups. It is a reliable signal, when used together with higher timeframe ranges and key support and resistance levels. Ideally, we want to see a spike bars plot at the outer end of a higher timeframe range, or at pivot and VWAP support/resistance levels. This is where different traders‘ belief systems line up, giving us high probability setups.

Our next post will be on reversal bars. This setup is similar to spike bars in that it signals rejection of price at a specific level. These are both high probability setups and compatible with the pivot and VWAP price levels that many of you already use.