In today’s trading tutorial we are going to discuss one of the easiest patterns we see in our Live Trade Room every day, called the ‘Spike and Ledge Pattern’.
The Spike and Ledge Pattern was originally defined by Larry Connors and Linda Raschke in the book ‘Street Smarts’.
The Spike and Ledge Pattern uses a ‘SPIKE’ in the price-action on the chart, followed by a short period of consolidation (which creates the ‘LEDGE’), followed by a reversal back to where the price came from originally.
Day Trading with the Spike and Ledge Pattern is easy:
Find the SPIKE on your chart:
First we look for a period of consolidation on our chart, followed by a SPIKE in price that completely breaks free of the consolidated price-range.
Find the LEDGE on your chart:
Once you see the SPIKE, now wait for at least 10 candlesticks to form a sideways-trading-range which we will call the LEDGE.
Mark the highs and the lows of this sideways-trading-range and be ready to use the extremes of the trading-range for the entry trigger.
Find the Entry Trigger:
Look for a candlestick to close outside of the sideways-trading-range, which triggers the entry short in this example.
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Place the stop-loss:
We always use a stop-loss to protect the capital in our trade account, and the stop-loss is placed above the highs of the sideways-trading-range (ledge).
Remember, the stop-loss only triggers when a candlestick CLOSES above these highs.
Place the Profit-target:
We use 2 profit-targets on this pattern. The first profit-target is placed at the 50% retracement of the lowest point (A) of the consolidation period before the spike up.
The second profit-target is placed at the (A) point on the chart, which is the lowest point of the consolidation period.
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