Table Of Contents
Price Spike Meaning
Price spike in finance refers to a sudden or unexpected movement in the price of an asset (like company stocks). It can be either in an upward or downward direction, but it mostly rises high. Therefore, it causes a bullish trend of large differences between price ranges.
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The price spike up is mostly visible in the equity, bond, and commodity markets. It creates a large price difference in the asset in a very short period. There can be different factors that cause this spike to occur. However, applying the right trading strategy can book profits during such spiking periods.
Key Takeaways
- Price spike refers to a financial term used to describe the sudden price movement, usually in the upward direction. In other words, it is a bullish trend causing a rise in the stock price.
- Many factors influence the spikes, namely demand and supply, company earnings or related news, economic factors (inflation or recession), and volatility factors.
- Technical analysts use this spike as a tool to curate trading strategies and book profits in less time. The utilization of the scalping technique is also preferable in this case.
Price Spike Explained
Price spike is a financial term used to describe the sudden rise or fall in the prices of financial instruments traded in the markets. It is a post-effect of different economic and social factors affecting equity stocks. Also, it indicates the traders and investors on their trading decisions. So, if a stock experiences a good or best price spike, chances of rising upward are high. And if that happens, the traders may book their profits. However, it all depends on the momentum and direction of the spike.
The mechanism of price spike depends on the major market forces of demand and supply. Either a surged demand or limited supply tends to spike in the prices. This spike is like a long bridge that connects the upper and lower candles. However, this concept is not akin to the gap observed in prices. In other words, unlike the gap, the price spiked up, leaving no distance between the two heights. It is in a continuation to the previous price range but in an upward direction. However, the gaps create a break (or disconnect) in the candlesticks.
Furthermore, price spike also applies to commodity and forex (foreign exchange) markets where fluctuations are common. It gives a signal for traders to switch their trade positions. Thus, any currency having a spike will alert the trader to sell a few quantities to gain some profit from it.
Factors
Various factors lead to the spike in asset prices. It can be economic, social, internal, or external factors having a significant impact on the asset. Let us understand them in brief:
#1 - Market forces (Demand and Supply)
Demand and supply are the prime factors that influence stock prices. Any sudden change in market demand can cause a spike in itself. For instance, a broker may suggest to his clients that they buy a specific stock out of speculation. In that case, the spike will be sudden and bullish.
Likewise, even limited supply behaves similarly where the stock is limited. It might occur due to the few shares available for trading. As a result, the price spikes to another level. One such example includes the shares issued during the initial public offering (IPO) that led to a sudden spike in market debut.
#2 - Company earnings
Earnings or any company-related news also affect the stock price. The price has a major impact, which decides the level (or percentage) of the spike. Thus, any good news regarding a company, industry, or nation creates a bullish trend for the stock.
#3 - Inflation or recession
There are certain economic factors like inflation, recession, growth rate, or interest rate announcements that also lead to spikes. If the government releases an optimistic rate that favors the nation's benefit, the stocks may experience a good trend.
#4 - Volatility
Rapid or sudden price movements can sometimes trigger the market circuits that cause a volatility break. The market may halt trading and resume it later. As a result, the trades placed earlier will open at a new price that includes a spike in it already.
How To Trade?
In technical analysis, price spikes usually mean an upward or bullish trend followed in the stocks. A good spike often benefits traders and investors. Here are some of the trading strategies that are useful during spikes. Let us understand them:
#1 - Analyze the factors causing a spike
The foremost step in this trading strategy is to analyze or identify the factors that are causing the spike. Once identified, it makes it easy for traders to estimate the intensity of that spike. For instance, if the spike is due to company earnings, it can cause a PEAD to last for at least 60 days.
#2 - Create a best price spike trading strategy
The upcoming stage includes creating a strategy for the same, including timely entry and exit. It ensures a maximum profit booking period for the trader. Some technical analysts prefer to observe the spike and decide on the strategy. For instance, the spike caused the price to rise from $40 to $65. In that case, if this spike remains for a short time, it can be a sudden anomaly. However, if a trader sells a few quantities at this spike and buys at a negative spike, the profit remains.
#3 - Watch for any reversal signals
At the same time, the spike can also stay for a limited period and change the track. It means that a spike may turn candles green for 30 minutes and enter into a bearish (downward) trend. Hence, it is necessary to watch out for such reversal signals and trade wisely.
#4 - Including scalping technique
Likewise, traders can also use scalping techniques during such spikes. Technically, scalping allows a person to benefit from the small movements in the stock prices and exit within a few minutes. However, it is also essential to consider risks, if any.
Examples
Let us look at some examples of best price spikes to understand the concept in a better way:
Example #1
Suppose Kevin is a trader who has been trading for the past five years. During this timeframe, he has accumulated adequate knowledge of the markets and different strategies. Also, he has traded in the crypto markets and made profits from the price differences in the coins. However, in recent times, Kevin observed an anomaly in the equity market. He witnessed that some technology-based companies were about to declare their results. As a result, there was a substantial effect to be seen on those stocks. Therefore, he bought some shares of wish-listed stocks.
On the announcement, a majority of stocks had given positive results in the last quarter. As a result, investors, along with Kevin, saw a sudden price in the Dow Jones U.S. Technology Capped Index and their stocks. Also, he saw a sudden crypto price spike at the same time. And now that the price was up by 20%, Kevin sold his holdings and booked a profit of $10,000. Later, when the spike ended, he again purchased some and added them to the portfolio.
Example #2
According to a recent news update as of February 8, 2024, the shares of SoftBank Group Co. saw a price spike of 10% amidst Arm Holdings Plc's bullish earnings forecast. A day before, the Arm released the company sales forecast, which further spiked the prices by 30%. It also beat the expectations of Wall Street and reached $131.27 on the current date.
Frequently Asked Questions (FAQs)
What is a currency price spike?
What is the difference between a price spike and a volume spike?
What are the two types of price spikes?
