Volume Spikes Strategy

Volume spikes are often the result of news-driven events. It occurs when there is an increase of 500% or more in volume over the recent volume average. This volume spike will often lead to sharp reversals since the moves are unsustainable due to the imbalance of supply and demand. Trading counter to volume spikes can be profitable, but it requires enormous skill and mastery of volume analysis.

These volume spikes can also be an opportunity for you as a trader to take a counter move position.  You need to know what you are doing if you are going to trade volume spikes.  The action is swift and you have to keep your stops tight, but if you time it right, you can capture some nice gains.

Let's walk through a few volume spike examples, which resulted in a reversal off the spike high or low.

In the below example we will cover the stock Zulily.  The stock had a significant gap up from $13.20 to almost $16.

Volume Spike Reversal

Notice how the stock never made a new high even though the volume and price action was present.  This is a key sign that the bears are in control.

In Summary

1. The high or low of the first candle is not breached
2. The first candle has significant volume
3. The subsequent heavy volume events further establish the reversal in trend from the initial spike after the opening range
4. Place your stops directly above the high or low of the first candle

Volume Spikes with Long Wicks

The other setup with volume spikes are candlesticks with extremely long wicks.  In this scenario, stocks will often retest the low or high of the spike.  You can take a position in the direction of the primary trend after the stock has had a nice retreat from the initial volume and price spike.

Below is an example from a 5-minute chart of the stock Depomed, ticker DEPO.  You will notice how the stock had a significant gap down and then recovered nicely.  Once the recovery began to flatline and the volume dried up, you will want to establish a short position.

Long Wick

Let's take another look at a long wick setup.  The below chart is of Frontier Communications, ticker FTR with a long wick down.  The stock then recovered and flattened out, which was an excellent time to enter a short position.

Another Long Wick

In Summary

1. Identify a high volume gap with a long candlestick on the first bar
2. Wait for the stock to eat into the morning gap and volume to drop off
3. Take a position in the direction of the primary trend with a price target of the low or high of the wick