Spike and Ledge Pattern

The "Spike and Ledge" pattern was first defined by Larry Connors and Linda Raschke in the book, Street Smarts. As the name suggests, markets make a "climax high" or "climax low" (New High or New Low) spikes followed by a resting point or "ledge" then a reversal of the prior trend.

A "Ledge" pattern is defined as a series of bars with matching lows and highs within a certain number of bars, namely 20. Usually "ledge" patterns are considered as a resting point before markets pick a clear direction, which is mostly a reversal of the current major trend. Ledge patterns are effective in all time-frames but they are more effective during intra-day trading.

Trade: Set a trade entry at the "breakout" or "breakdown" from the "Ledge" formation. Wait for a clear breakdown or breakout and enter at the low (or high) of this bar.

Stop: Place a "stop" order on the opposite side of the "Ledge" pattern. For long trades, place a "stop" order below the low of the "Ledge" pattern. For "short" trades, place a "stop" order above the high of the "Ledge" pattern.

Target:

Usual targets would be the prior "major swing high" for long trades or prior "major swing low" for short trades from the "breakdown" or "breakout" levels. If markets experience a "gap" prior to the "Spike" formation, targets after a breakdown/breakout from the "Ledge" pattern would be the "gap" levels. Otherwise, the target would be a prior "swing low" or prior "swing high" before the "Spike" formation.

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