Nowadays, there are many algorithmic trades in the markets, which are usually responsible for short-term movements. When you see rapid price increases, it usually happens because of algorithms. These are automatic algorithms programmed to identify opportunities in the market based on certain data and are almost always the first to move the price.
There are even algorithms programmed to exploit other algorithms. Some examples of these algorithms at play are when you see sudden large price increases when a news or economic report hits the news outlets. This happens regularly and the trick is to identify when the reaction is good or bad.
Algos don’t have human foresight (not yet at least). There are many cases where they move the price in the wrong direction. For example, when an economic report is released that looks good on the surface, but the details are bad.
In such cases, you will see a rise in the direction of an attractive stock and then a slowdown in movement later as real money begins to trade in the opposite direction. Sometimes even if they are right, and for a day trader, the problem is that they may have already changed the price for the average daily range. In such cases, you might see a pullback before another wave in the direction of the peak.
Knowing this can help you mitigate the reaction of the algos according to your individual bias when you think the reaction is wrong-footed and enter at better prices or join the momentum that will be created if the reason is consistent with the fundamental orientation.
Other examples of short-term spikes may include what is called a “fat finger.” This is when a large institution mistakenly enters the market with a huge size and immediately closes the position. Other times it may simply be a period of low liquidity and an order that is too large may not find counterparties close to its price, causing the price to move more than usual and some algorithms may exacerbate the movement due to certain dynamic inputs.
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