The Spike Base
Although not a new concept, the Spike Base trade isn't something many people talk about. It's a concept I often revisit to understand price and value after a significant end-of-day move.
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What is it?
The term 'spike' is derived from Market Profile and refers to a rapid upward or downward movement into the close, often observed in the last 30-45 minutes of the trading session (see image). This surge makes it nearly impossible for traders like us to discern whether the price has quickly deviated from what is considered fair value.
How to Find the Spike Base
Finding the Spike Base is the easy part. It is identified as the low price before the price spiked into the close, often referred to as an end-of-day rally. Trading it, however, requires some skill. Here's how I approach it.
What Does the Open Price Tell Us?
Finding the Spike Base is the easy part. It is identified as the low price before the price spiked into the close, often referred to as an end-of-day rally. Trading it, however, requires some skill. Here's how I approach it.
Price Opens [ABOVE SPIKE]: If the price opens above the spike, I consider this bullish. It suggests that we haven't auctioned high enough to attract sellers, potentially leading to higher prices. We'll delve into a scenario where this was traded for a +233% return
later in this post.
Price Opens [WITHIN SPIKE]: An opening price within the spike indicates fair value to me, and I would expect two-way trading.
Price Opens [BELOW SPIKE]: If the price opens below the spike, this signals bearish sentiment and a clear rejection of the higher prices within the spike. This could lead to lower prices unless we find acceptance above the Spike Base.
How to trade The Spike Base?
Now, let's get to the crucial part: how to trade this. Understanding the concept is important, but I know this is the interesting part.
I mark and label the Spike Base on my charts as a reference point.
Observe where the price is opening: Above, Within, or Below. In our case, it opened within, which led us to be cautious, anticipating a possible test of the Spike Base pivot.
The Trade Idea was shared early with the group: JAN 10 $SPX 4770c on a 4731 B/T (Back Test), allowing ample time for the trade to unfold.
Monitor price action and its behavior around this base. Does it dip and rip? Does it base then move higher, or does it break with volume, thus invalidating this trade? A break with volume might suggest considering a short position, but that's a topic for another time.
My stop was set just under 4725, a significant level of resistance/now support. With a 6-point stop and the previous day's High of Day (pdHOD) as our target, approximately 35 points higher, this offers a very favorable risk-reward ratio.
Final Thoughts
There are many nuances to this strategy, and this outline is just how I've learned to trade it. My hope is that it can assist you in your trading career as much as it has in mine. While this isn't the only strategy in my playbook, it's one that, if traded correctly, can yield significant rewards.
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