What is the spike in the forex chart?
The sudden large movement on the Forex market due to an imbalance of liquidity is called a spike. We can see such spike most of the time on major data releases such as Non-Farm Payroll (NFP), FOMC statement, ECB Press conference, Rate declaration, etc. We can also see such a spike in normal market conditions without news.
To understand this topic first you need to know about Liquidity. Below we write details of liquidity activities and how it influence forex chart to make a spike.
What is Liquidity?
Liquidity is a measure of how easily an asset can be exchanged. Liquidity is an economic term that designates the amount of money immediately available. Thus, when we talk about liquidity, we tend to designate the assets, in cash. Market liquidity depends on the asset concerned, but within the same asset class, there are also different levels of liquidity. Infect, for the liquidity forex market moves in a certain direction.
Liquidity risk: one of the main risks linked to investment
Liquidity risk is an inherent risk in investing. It refers to the fact of not being able to sell its assets m at a price far below their intrinsic value. This fall in prices in order to conclude a sale on an illiquid market is called illiquidity discount.
Liquidity is very much relative to create a spike in the forex chart. Forex Spike Trading is a popular trading style to some traders, I am here going to describe on the financial, technical causes behind the creating spikes on the chart. To build up Spike Trading Strategy you need to know the real cause of Spike.
In this view mainly two reasons are behind here:
1. Excessive liquidity
2. Lack of liquidity.
As a trader, you already familiar with also 2 types of spike we can see in the market: a. False spike b. Real spike. I have stated here those types to make easy to understand the topics.
Excessive liquidity and illiquidity in banking are situations of concern for the monetary authorities of a country. Excessive liquidity leads to a Real spike in the market. When there is excessive liquidity market spike and make a fresh movement. The market needs not any news or fundamental issue for this movement. Most of you may be surprised by seeing this movement without any news. But the truth is that when there is excessive liquidity market move crazily and this leads to a fresh movement. This excessive liquidity play in the market because of Professional money, Big investor, or Bank takes their position. This movement can occur at any time with or without any news.
Lack of Liquidity
Lack of liquidity leads to a False spike in the market. Illiquidity raises fears of bank panics, which can lead to rushes on deposits, sometimes leading to banking crises. In forex trading, we refer to the market liquidity is closely linked to that of the liquidity of a financial asset. This refers to the speed with which this asset can be exchanged for money without loss of value.
Illiquidity occurs mostly at the time of the news. During news time or 1/ 2 minutes before the news, the market moves crazily in a direction, then returns immediately to the level from where it starts the movement by making a false spike. This is because if there is a lack of liquidity market moves crazily up or down to collect the liquidity. But it can’t sustain and return to the level from where it starts to move. This is because when markets make such a false spike to collect liquidity the interbank cannot shift the exchange rate and they still trade with the previous price level, for this reason, market return to the previous price by creating a false spike.
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