Chart patterns are valuable because they give us clues as to what the markets might do next.
In this tutorial, I'll introduce you to the Second Spike chart pattern. I'll show you how to identify it properly and what it can tell you about what the market is likely to do next.
The Second Spike chart pattern is a reversal pattern that happens after a strong move, usually in the bullish direction. It signals that the market could be reversing and may provide a trading opportunity in the opposite direction.
Now let's get into how to identify and trade this pattern.
How to Identify a Second Spike
There are basically 3 components of this chart pattern.
Once these characteristics are present on your chart, you may have a Second Spike.
1. Look for a Strong Move
The first criteria to look for is a strong move in the upward direction.
This pattern works best with bullish reversals, so I'm only going to look for strong upward moves. It can work for bearish reversals, but I've noticed that it's less reliable.
But test both to see what works best for the market you're trading.
Here's an example of a strong bullish move.
2. Mark off the Elbow
The elbow is a zone on a chart where price previously turned.
Mark off the bottom of the turn, until about half way to the high of the move.
You're going to be targeting this area if the market does a Second Spike.
This is what it looks like.
3. Look for a Retracement Back Into the Elbow
Now that you have the retracement zone marked off, it's time to watch your chart and wait for price to move back into that area.
Set an alert if your platform has that feature.
This will ensure that you never miss a trade.
Once price enters the zone, it's time to take a trade.
How to Trade a Second Spike
Now as you may have guessed, the ideal entry for trading this chart pattern is to take a trade as soon as price gets into the elbow zone.
This is called a Hard Fade entry and you can learn more about it here.
Do not wait for any confirmation.
Entering as soon as price enters the elbow zone will give you the best chance of success and is usually the cheapest price you're going to get on this trade.
The example above shows an idea entry in the elbow zone. The trade worked out well, with price moving back down near a previous support level.
Examples of Second Spikes
Here are more examples, so you can see this concept in action. I'll show you each step of the process, so you'll have a better idea of what to look for in real-time.
After a big bullish move, price starts to stall and forms a top.
At this point, I mark off the elbow zone, as shown in this chart.
Next, I wait for price to re-enter that zone and I take a trade in the opposite direction. Here's where I would take a short trade.
It can take a little bit of practice to enter these trades because the big bullish bar might make you nervous.
But once you get the hang of it, that's not a big deal.
The stop loss will go above the highest high of the last move.
Now that the trade is on, I'm just going to sit back and wait to see what the market does.
I would set a take profit on this trade, based on where I think price is likely to go. The horizontal lines would be my 2 potential profit targets.
In this example, I did not get stopped out. Price retested the elbow zone, but it did not hit the stop loss.
If I was able to hold the trade for this long, I would have been rewarded with a big downward move.
As you can see, it took some time for this trade to work out, so I would have had to be patient.
Not all Second Spikes are clean, some of them are messy, like in this example.
Now I'll speed things up a bit and put all of the information on 1 chart.
There was a strong upward move in the GBPJPY and there were 2 opportunities to enter a short position on a Second Spike entry.
This is another example where there were 2 opportunities to enter on a Second Spike.
If you took this trade, it would have worked out well, with price dropping below previous support.
What Happens When They Don't Work
If a Second Spike doesn't work, your stop loss will get hit and you're out of the trade.
It's all good, move on to the next trade.
Just like with any other profitable trading strategy, not all trades will be winners.
But if you've backtested your strategy and it has an edge, then keep calm and keep trading.
Final Thoughts on Second Spikes
Now that you know what Second Spikes look like, it's time for you to create a trading strategy.
If this chart pattern appeals to you, of course.
The first step is to create a trading plan. I have a free worksheet that will help you create a detailed trading plan.
Then backtest your trading strategy to see if it has an edge.
If your strategy doesn't perform as well as you would like, experiment with different ideas and optimizations until you develop a trading strategy that you're happy with.
Now get to work!