Candlestick charts are a boon to modern traders, with the vast majority of financial trading platforms providing this charting method. The technique of ancient Japanese rice trades still rules the modern-day charting with its humble candlesticks. Technical analysts love candlestick charts because of their simplicity and the wealth of information they provide in terms of individual candlesticks and also as chart patterns. Candlestick patterns provide the best trading opportunities with a good risk and reward ratio.
Moreover, they provide both exit and entry rules and help the trader to assess the risk and reward in advance. This particular characteristic of the candlestick pattern assists the traders to stick to trading discipline. Candlestick patterns appear frequently in the charts and are found in all intraday charts as well as long-term charts like the daily, weekly, and monthly charts. The candlesticks can be well identified by new and advanced forex traders and traders who are new to technical analysis and pattern analysis. The pattern can be used to trade by swing traders especially, but since the pattern forms in all chart time frames, it can be used by scalpers and short-term traders too.
Traders should note that there is much software available that can scan the patterns automatically and alert the trader. So, traders can incorporate these into complex technical trading strategies and benefit from the automatic scanning of the pattern. Once the pattern is scanned and identified automatically, it can be further validated with a trading plan.
Also Read: The Shooting Star Candlestick Pattern
Contents
- What is a Spinning Top Candlestick Pattern?
- Bullish Vs Bearish Candlestick Pattern
- How Is Spinning Top Candlestick Formed?
- Reversal Vs Continuation Candlestick
- What Does Spinning Top Candle Pattern Indicate?
- How To Trade Spinning Top?
- Doji Vs Spinning Top
- Limitations
- Conclusion
What is A Spinning Top Candlestick Pattern?
The above image shows the spinning top candlestick, the spinning top candlestick has a small real body and long wicks on either side of the real body. The candle can be a Bull candle or a Bear candle, in terms of a Bull candle the closing price is slightly higher than the opening price of the candle. On the other hand, the closing price is slightly lower than the opening price. The real body of the candle in both cases is very small compared to the wicks. The candlestick can be a BULL or a BEAR candle as it doesn’t signify or add weightage on the closing of the pattern candle. However, the subsequent candle helps the forex trader to assess and confirm a price reversal or price continuation.
Bullish Vs Bearish Candlestick Pattern
The purpose of technical analysis is to identify the future path of a trading instrument. Technical analysts look for Bearish and Bullish trend direction and then devise a plan accordingly. Candlestick analysis also provides candlestick patterns that provide an answer to the question of whether the market will be Bullish or Bearish. Candlestick patterns can be further classified in Bullish and Bearish candlestick patterns, but the Spinning top candle in particular shows indecision of the Bulls and the Bears.
Also Read: Bull flag, Bear Flag and Pennants: The Verdict
How Is Spinning Top Candlestick Formed?
The spinning top candle indicates indecision on the market. The small real body with a very small difference between the opening and closing price shows neither the Bulls nor the Bears were able to take control of the prices. Similarly, the long wick indicates the battle between the Buyers and Sellers and the outcome of the same. Buyers were able to push the prices higher but lost it to the Sellers who were able to bring the prices lower. These lower prices did not last long as the Buyers regained enough strength to neutralize the Sellers, thus there was no clear winner during this candlestick.
The candle forms due to the indecision of the market, which technically indicates that the Buyers or Sellers both have equal strength and that price may move either way. But most technical analysts see this as the weakness of the current trend and anticipate a price reversal and look for confirmation of price reversal to formulate a trading strategy.
Reversal Vs Continuation Candlestick
Patterns Trend traders look for candlestick patterns that can assist them to decide whether the current market trend will continue or reverse its current trend direction. This vital assessment of the price helps the trend trader to understand the current trend and also to look for a reversal of the current trend. Furthermore, candlesticks can indicate the current trend strength level so traders can devise trading plans accordingly. The spinning top pattern is neither a reversal nor continuation pattern, however, the subsequent candles provide the confirmation of price trends.
What Does Spinning Top Candle Pattern Indicate?
The indecision in the market can form at the end of the price trend or during the market consolidation phase or during low volatility trading hours. Traders should ignore the spinning top identified during a low volatile trading hour, like to the end of market hours. Low volatile trading activity generally produces candlesticks with small bodies and should be ignored. Similarly, price action during the market consolidation phase may also contain small bodies and may not produce significant trading results. So, traders should avoid including these in technical analysis.
On the other hand, the spinning top formed during the end of a price trend indicates a trend reversal. During the end of reversal, these candle formation gives a vital clue to the forex technical trader. Because during a downtrend instead of forming lower lows or candles with long bearish candlesticks, if the market shows a spinning top candle. It will be very clear that the market has become indecisive and there is a strong case of a trend reversal.
This alerts the trader to formulate a reversal trading strategy either to exit the current trade or to switch direction entirely. On the other hand, if the spinning top forms in an uptrend, instead of forming higher highs. The technical traders can devise a trading strategy to exit the current trade or to look for bearish reversal trades.
How To Trade Spinning Top?
The above price chart shows the trading method of spinning top candlestick. The price is already in an uptrend with long white Bull candles. At the end of the trend, the spinning top candle appears with a small white real body and long wicks. This shows the weakness of the Bulls and the emerging strength of the Bears, strong enough to stop the Bull run and for now, hold the Bulls. In technical analysis, this state of indecision acts as a strong case for price reversal.
The next candles show a Bear candle and confirm the potential price reversal. So, a SELL trade can be placed once the price crosses the low of the Spinning top, with a stop loss at the high of the spinning top candle. The potential take-profit target is at least twice the length of the spinning top candle. However, it is better to ride the trend. Technical traders can hold the position and look for any reversal pattern or trend weakness and exit accordingly.
Similarly, during an established downtrend, if the price forms a spinning top candle, it indicates a trend reversal. So, traders can anticipate a price reversal. In the subsequent candle if the price rises higher and goes higher than the high of the spinning top candle. Forex traders can place a BUY trade with a stop loss below the low of the pattern candle. A potential take profit point to twice the size of the pattern candle. However, it’s best to ride the trend by holding the position and look for exit upon trend weakness or reversal signals.
Doji Vs Spinning Top
The above image shows the spinning top pattern and the Doji. Though both candles have a short body and long wicks. The real body of the Doji is almost next to none, as the opening price and closing price of Doji are almost the same. Comparing to the Doji the real body of the Spinning top is wider.
Both Doji and Spinning tops help the trader to identify price reversals and both formations are invalid if formed during low volatile market conditions. Doji can be further classified into Gravestone Doji, Long Legged Doji which may indicate a trend direction in advance. But the Spinning top pattern shows indecision in particular.
Limitations
Like all patterns, the spinning top candlestick pattern is also subject to failures. As discussed earlier in this article the candlestick itself does not provide a trend direction but it provides in conjunction with the next or subsequent candle. The main purpose of the candle is to indicate the termination of the current price trend. Thus, it helps the forex trend trader to exit the current position. Many traders exit partial positions upon identifying the trend weakness.
Additional confirmation is required to trade this candlestick pattern. Price action and confirmation using additional technical indicators are essential for the success of this spinning top pattern. Additionally, the appearance of this spinning top candlestick pattern near established trend lines, support and resistance lines, and channels add more weightage to the candlestick pattern. So, traders must use other technical indicators and arrive at a conclusion upon the confluence of indicators.
Conclusion
The Spinning top candlestick pattern is an essential candlestick pattern that forms regularly and can be identified easily due to its shape. The pattern shows indecision in the current market trend but is considered as a price reversal pattern. Since indecision means the price can be a trend continuation or a price reversal. So, the subsequent candle to the pattern candle is essential to decide a potential price reversal.
