Discussion Topic: Spinning Top Candlestick Pattern
In this article, we will discuss the spinning top candlestick pattern. In this lesson, you will learn how to identify a spinning top candlestick pattern? What they convey about the market trend? When and how spinning top candle helps in trading?
What is a Spinning Top Candlestick Pattern?
The Spinning Top candlestick pattern is formed by a single candle. This is a very mysterious candle by its nature. It can form at the bottom of a downtrend, at the peak of an uptrend, or in the middle of a trend.
This pattern forms when there is an indecision in the market among the buyers and sellers. Do NOT treat this spinning top candle as a strong reversal or continuation signal. It just tells us that there is a confusion in the mind of traders about the direction of the market. And more or less equal amount of traders are thinking in opposite direction of each other.
If this pattern is appearing at the top of a trend or at the bottom of a trend, then this suggests that a possible trend reversal may happen. If it arises in the middle of a trend, then the hit ratio of this pattern is negligible.
It may be a bearish or bullish candle, but the color of the candle does not have to be considered while doing technical analysis.
How to identify a spinning top candle?
It’s a small single candlestick pattern. In this pattern, the open and close price of the stock (or instrument) is near to each other for a particular session. And the shadows at each side should be of almost same size.
So, the identification mark for an ideal spinning top will be:
- Very small actual body
- The length of shadow should be more than the length of the body.
- Length of the upper and lower shadow has to be more or less of the same size.
- The more the length of the shadow, is considered to be a more powerful indication.
- The color of the candle does not have much significance.
Though finding an ideal spinning top is quite difficult, you may still use some variations of this rules to match this. Images of some of the variations are given below:
How to Trade the Spinning Top Candlestick Pattern?
It simply means that neither the buyers nor the sellers could gain the control of the market. Hence, the result was a standoff.
It can be interpreted as such:
- If a spinning top pattern forms during an uptrend (preferably at top of trend), this typically means that there aren’t many buyers left and a possible reversal of trend could occur.
- If a spinning top form during a downtrend (preferably at bottom of trend), generally means that there aren’t many sellers left and a possible trend reversal could occur.
In either case, you should wait for a confirmation candle or pattern before entering into a trade.
A Detailed Explanation With Few Examples:
The Real Body - It must have a really small body. Suppose a stock is trading near $500. In some session, the open price was $501 and the close price was $505 (or vice versa). So, the real body becomes of a length of 4 points, which is very small with respect to the stock price. Hence, the real body of that candle will be quite small. It may be a green or red candle. The color of the candle does not matter in case of spinning top.
The Upper Shadow - The upper shadow connects the real body to the highest price point of the session. Suppose for the same $500 stock, the high of that session was $510. Hence, the upper shadow is more than the length of the body. The presence of the upper shadow implies that the bulls did attempt to take the market higher, but was restricted by the bears.
The Lower shadow - The lower shadow connects the real body to the lowest price point of the day. Suppose for the same $500 stock, the low of that session was $494. Hence, the upper shadow is more than the length of the body, and more or less the same as the length of the upper shadow. The presence of the lower shadow conveys that the bears did attempt to take the market down, but was restricted by the bulls.
Now think about the spinning top as a whole by combining all the above components i.e real body, upper shadow, and lower shadow. The Bulls attempted to take the market higher and the bears tried to take the markets lower, but none of them succeeded. Moreover, the force of their attempts was more or less same. Hence, the spinning tops can be thought to represent a market having indecision and uncertainty.
As without a trend, this pattern means nothing special. So, let’s see the performance of spinning top with respect to the trend in the chart.
The Appearance of Spinning Top in an Uptrend:
An uptrend in the market implies the bulls have been in absolute control over the last few trading sessions. However, if spinning tops appear in this situation, then it gets bit tricky:
This could mean any of the below:
- The bulls are no longer in full control.
- Though not successful, the bears have tried to make an entry to the market. But the fact to be noted that the bulling trend may be getting weaker.
- The spinning top basically expresses indecision in the market. Hence, two things may happen:
- The bulls could be making partial profit booking before initiating another phase of moving up.
- Or the bulls are winding up their positions and may give way the control to bears.
The chances of both these events taking place are equal i.e 50%. Hence, it is advised to watch the movement closely and wait for another confirmation signal (other confirmation candles) before taking further decision.
If you are working with large quantities of stocks then this may be a good time for you to book partial profit and wait for the reversal or continuation with rest of the stocks in hand.
The Appearance of Spinning Top in a Downtrend:
An downtrend in the market implies the bears are controlling the market for the last few trading sessions. However, if spinning tops appear after a long downtrend, then the situation gets bit tricky:
This could mean as below:
- The bears no longer hold the absolute control of the market.
- Though not quite successful, the bulls have attempted to check the continuous price fall by creating new long positions.
- Hence, one of the two probable actions may take place in next few sessions:
- The bears are booking partial profit, and there will be a continuation of another round of selling.
- The bears are closing their positions, and the markets could reverse its directions towards uptrend.
As the spinning top candlestick pattern does not provide enough clarity, the chances of occurrence of both these events are equal i.e. - 50%. Hence, it is advised to watch the movement closely and wait for another confirmation signal (other confirmation candles) before taking further decision.
If you are working with large quantities of stocks then you may consider this time for booking partial profit and wait for the reversal or continuation of the trend with rest of the stocks in hand.
We hope that you have enjoyed the above article explaining the Spinning Top Candlestick Pattern and how to trade with it. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
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