Understanding Spikes in Investment Trading Price Bars
Sometimes the trading market delivers a price bar that looks like the investment activity went crazy that day. This creates a spike, where the high or the low is very far away from the general trend of things and the bar itself is abnormally large (wide high–low range).
In some cases, like that shown in the following example, a spike turns out to be an anomaly. The spike low suggests that some people panicked and were selling at such a high quantity and at such a frantic pace that the few buyers still around were able to buy at abnormally low prices. On this chart, the sellers panicked unnecessarily. The next day, the price resumed its uptrend and its same “normal” high–low range. The spike was just an oddity — a random move.
The bottom spike example is a key reversal because on the next few days, the price proceeded to make lower highs and lower lows. This spike in the size of the daily high–low range was a warning of a reversal. Key reversals can be ordinary bars and aren’t always spikes, but when you see a spike, always ask yourself whether it may mark a reversal.