Learn Forex Trading: Rejection Spike Pattern

There is a little-know candle formation that is highly accurate and very tradable, but it is seldom used or even noticed. It's called the Rejection Spike.

When you are aware of this particular spike formation, you will have a clearer heads-up of a potential trade or when you should be considering exiting a trade you are already in.

The Rejection Spike is a reversal formation and always occurs at a nearby level of support or resistance.

Price will push through a recent level of support or resistance, but fail to close past it. This will cause a spike formation at this level and from there the price will generally move away from this level. Levels of support and resistance are very important to traders, they become psychological price points that have an effect on the price action. Traders buy and sell off these levels, and failed attempts to push past them provide excellent trading opportunities.

Bearish Rejection Spike

A Bearish Rejection Spike will occur when the market is moving upwards to a level of resistance. The price will move up and past this level and then get pushed back down below this level of resistance and end up closing below it.

The attempt of the market to climb higher was denied by the sellers. There is more selling pressure than buying pressure, and this can come from a couple of things.

1. Traders closing long trades at this level of resistance as it was being used as a target. (In order to close a long trade, it must be countered with a sell trade. This happens automatically when you

close a position.)

2. Traders opening short positions once price has tagged this level of resistance. (This level has proven to be a reversal point recently, so a new short trade at this level becomes a safe bet)

SELL TRADE RULES

1. Price has to form a level of resistance.

2. Price has to cross above the level of resistance (without closing

above it).

3. Price has to pull back below the level of resistance and close below it.

4. Enter a short position on the close of that candle.

5. Place the Stop Loss few pips above the spike of the candle.

6. Place the Take Profit same distance away from the entry (1:1).

Alternatively, you can use the 2:1 reward to risk ratio.

7. Manage your trade by choosing one of the options.

TRADE MANAGEMENT OPTIONS

1. Trail your stop loss. With Stop Loss Trailing, your Stop Loss level will automatically update as the price moves.

2. Move to Break Even. Once the price has reached 50% of the target distance, move your stop loss to break even.

Step 1.

Price will form a level of resistance.

Step 2.

Price will move above the level of resistance.

Step 3.

Price gets pushed back down and closes below level of resistance.

Step 4.

Enter a short position on close of candle.

Stop loss will be placed over the high of the spike and place your take profit at 1:1 or a 2:1.

Step 5.

Manage the trade as it progresses.

Sell Trade Example 1

Let’s take a look at this trade example.

First of all, price must form a level of resistance (1). After that, price has to cross above that level of resistance (2). After the price pulls back and closes below the resistance level (3), we enter the short trade (4). Finally, we’ll set the Stop Loss and Take Profit. Stop Loss goes few pips above the spike of the candle (5). Take profit is set at 1:1 or 2:1 ratio (6).

Note:

If you are uncertain about which reward to risk ratio to use (1:1 or 2:1), then always go for the 1:1 reward to risk ratio. Your profit target will be the same number of pips as your stop loss.

Sell Trade Example 2

Here’s a second short trade example.

First we see price formed a level of resistance (1). After that, price has to cross above that level of resistance (2). After the price pulls back and closes below the resistance level (3), we enter the short trade (4). Finally, we’ll set the Stop Loss and Take Profit. Stop Loss goes few pips above the spike of the candle (5). Take profit is set at 1:1 or 2:1 ratio (6).

Note:

If you are uncertain about which reward to risk ratio to use (1:1 or 2:1), then always go for the 1:1 reward to risk ratio. Your profit target will be the same number of pips as your stop loss.

Bearish Rejection Spike

A Bullish Rejection Spike will occur when the market is moving downwards to a level of support. The price will move down and past this level and then get pushed back up above this level of support and end up closing above it.

The attempt of the market to drop lower was denied by the buyers. There is more buying pressure than selling pressure, and this can come from a couple of things.

1. Traders closing short trades at this level of support as it was being

used as a target. (In order to close a short trade, it must be countered with a buy trade. This happens automatically when you close a position.)

2. Traders opening long positions once price has tagged this level of support. (This level has proven to be a reversal point recently, so a new long trade at this level becomes a safe bet)

BUY TRADE RULES

1. Price has to form a level of support.

2. Price has to cross below the level of support (without closing below

it).

3. Price has to pull up above the level of support and close above it.

4. Enter a long position on the close of that candle.

5. Place the Stop Loss few pips below the spike of the candle.

6. Place the Take Profit same distance away from the entry (1:1).

Alternatively, you can use the 2:1 reward to risk ratio.

7. Manage your trade by choosing one of the options.

TRADE MANAGEMENT OPTIONS

3. Trail your stop loss. With Stop Loss Trailing, your Stop Loss level will

automatically update as the price moves.

4. Move to Break Even. Once the price has reached 50% of the target

distance, move your stop loss to break even.

Step 1.

Price will form a level of support.

Step 2.

Price will move below the level of support.

Step 3.

Price gets pushed back up and closes above level of support.

Step 4.

Enter a long position on close of candle.

Stop loss will be placed below the low of the spike and your take profit can

be a 1:1 or a 2:1 or whatever exit method you prefer.

Step 5.

Manage the trade as it progresses.

Buy Trade Example 1

Let’s take a look at this trade example.

First of all, price must form a level of support (1). After that, price has to

cross below that level of support (2). After the price pulls up and closes

above the support level (3), we enter the long trade (4). Finally, we’ll set the

Stop Loss and Take Profit. Stop Loss goes few pips below the spike of the

candle (5). Take profit is set at 1:1 or 2:1 ratio (6).

Buy Trade Example 2

Let’s take at another buy trade example.

First of all, price must form a level of support (1). After that, price has to cross below that level of support (2). After the price pulls up and closes above the support level (3), we enter the long trade (4). Finally, we’ll set the

Stop Loss and Take Profit. Stop Loss goes few pips below the spike of the candle (5). Take profit is set at 1:1 or 2:1 ratio (6).

Note:

If you are uncertain about which reward to risk ratio to use (1:1 or 2:1), then always go for the 1:1 reward to risk ratio. Your profit target will be the same number of pips as your stop loss.

You will find the Rejection Spike all over the place.

In the chart below, you will see several instances where the Rejection Spike

works out and results in a profitable trade.