Many traders try to avoid trading whenever there are market spikes and probably for good reason. Often, market spikes occur whenever there is an event which has caused disruption in the market. It could be a major news event, a big market player making a trade causing a huge move in the market, or a combination of events which may cause such a spike. These disruptions often mean very strong volatility and at times this volatility provide no clear direction.
Although trading market spikes may seem risky, many aggressive yet cunning traders make a lot of money trading these market spikes. This is because often times market spikes cause too much disruption in the market that the market would either become overbought or oversold. As soon as a bulk of the market participants notice this, many would trade the opposite direction believing that the market would correct the spike. If this happens, prices will quickly reverse as fast as it has spiked. The question is how these traders anticipate it.
First, let us ask what price spikes do to the market? It causes an imbalance. This imbalance is either called an overbought or oversold condition. The next question is how would the market naturally react to such a price spike? If you were able to buy a random item, for let us say $1 and someone offers to buy it from you for $50, what would your reaction be? You would naturally sell it right away. This tells us that overbought or oversold conditions are prime conditions for a mean reversal. This is the reason why the market tends to correct after a price spike. So, in order to anticipate such reversals, we have to confirm if the price spike did cause the market to be overbought or oversold. Then, we look for signals indicating that the market is about to reverse from such overbought or oversold conditions.
Oscillators are excellent tools for identifying overbought and oversold price conditions. A particular candlestick pattern, called a pin bar, is also a telltale sign of a potential reversal. Let us look into how we could make use of this combination in order to anticipate the reversals that follow a price spike.
Relative Strength Index
Table of Contents
The Relative Strength Index (RSI) is a popular momentum technical indicator used by many professional traders. Not only is it a momentum indicator, it could also be used to identify overbought and oversold price conditions.
The RSI is an oscillator type of technical indicator which plots a line that oscillates within the range of 0 to 100. This line mimics the movements of price action quite closely having nearly the same peaks and troughs as that of the price swing on the price chart.
The RSI range also has markers at level 30 and 70. These markers indicate the overbought and oversold price conditions. An RSI line which is above 70 indicates that the market is overbought, while an RSI line which is below 30 indicates that the market is oversold. Both conditions are prime for a mean reversal.
Some traders also add markers at level 50 to mark the direction of the trend bias. An RSI line which is above 50 indicates a bullish trend bias, while an RSI line below 50 indicates a bearish trend bias. Others also add markers at level 45 and 55 as these levels act as support or resistance levels for the RSI. Level 45 acts as support for an uptrend market, while level 55 acts as resistance for a downtrend market.
For our strategy, we will stick to the basics. We will be using the RSI as a basis for identifying overbought or oversold price conditions, which typically occur during a price spike.
The Pin Bar is a strong reversal candlestick pattern. It is formed by a candle with a very long wick on one side and a short body on the opposite side.
As you would notice the direction of the reversal is based on where the tail of the pin bar is pushing against. If the tail of the pin bar is below the body, this means it is pushing from below, thus it is a bullish pin bar. If the tail of the pin bar is above the body, then it is pushing from above, so it is a bearish pin bar.
We will be using the Find Pin Bars indicator to help us identify the pin bar patterns easily. This indicator simply blue stars at the bottom of a pin bar candle, and red stars above a pin bar candle it finds.
Bullish Pin Bar Spike Reversal
- The market should spike down with strong momentum causing the RSI line to drop below 30 indicating an oversold market condition.
- Enter a buy order as soon as the Find Pin Bars indicator plots a blue star below a bullish pin bar pattern.
- Set the stop loss a few pips below the pin bar candle.
- Set the take profit target at the body of the most recent swing high where the market started to spike down from.
Bearish Pin Bar Spike Reversal
- The market should spike up with strong momentum causing the RSI line to breach above indicating an overbought market condition.
- Enter a sell order as soon as the Find Pin Bars indicator plots a red star above a bearish pin bar pattern.
- Set the stop loss a few pips above the pin bar candle.
- Set the take profit target at the body of the most recent swing low where the market started to spike up from.
Reversals from market spikes is a viable trading strategy which many traders have made a lot of money from. In fact, there is a trader who spoke on one popular podcast saying that all he trades are reversals from market spikes and has made a lot of money from it.
However, trading reversals from market spikes is not that easy. Remember that you are trading against a strong momentum and are hoping that that momentum would end at the candle you traded on. There will be times when the market would not reverse and you will be stopped out. However, when the market does reverse, profits tend to be really high because of the good risk-reward ratios that are inherent in a reversal type of trade. This is the main reason why reversals from market spikes can be very profitable even with its difficulty.
Forex Trading Strategies Installation Instructions
Pin Bar Spike and Reverse Forex Trading Strategy – MT5 is a combination of Metatrader 5 (MT5) indicator(s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
Pin Bar Spike and Reverse Forex Trading Strategy – MT5 provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.
Based on this information, traders can assume further price movement and adjust this strategy accordingly.
Recommended Forex Metatrader 5 Trading Platform
- $30 Xmas Welcome Bonus to start trading
- 120% Deposit Bonus up to $40,000
- MT4 and MT5 trading platform
- Mobile versions of MT4
- 170+ trading instruments
How to install Pin Bar Spike and Reverse Forex Trading Strategy – MT5?
- Download Pin Bar Spike and Reverse Forex Trading Strategy – MT5.zip
- *Copy mq5 and ex5 files to your Metatrader Directory / experts / indicators /
- Copy tpl file (Template) to your Metatrader Directory / templates /
- Start or restart your Metatrader Client
- Select Chart and Timeframe where you want to test your forex strategy
- Right click on your trading chart and hover on “Template”
- Move right to select Pin Bar Spike and Reverse Forex Trading Strategy – MT5
- You will see Pin Bar Spike and Reverse Forex Trading Strategy – MT5 is available on your Chart
*Note: Not all forex strategies come with mq5/ex5 files. Some templates are already integrated with the MT5 Indicators from the MetaTrader Platform.
Click here below to download: