While trading in the stock market traders are always looking for an edge by trying out different technical tools whether it be technical indicators or technical chart patterns or candlestick patterns. One such candlestick pattern is the spinning top candlestick which is formed when there is indecision in the market.
In this article, we will discuss what a spinning top candlestick is, its formation, how it can be traded, and examples of a spinning top candlestick.
What Is A Spinning Top Candlestick?
A spinning top candlestick is a type of reversal pattern that appears in financial charts and is used by technical analysts to predict future market direction.
It is formed when the real body of the candle is relatively small compared to the upper and lower shadows, which indicates high and low prices for a given period of time.
The name “spinning top” comes from the appearance of the candle, which looks like a spinning top toy.
Interpretation Of A Spinning Top Candlestick
Spinning tops are generally considered to be bullish or bearish reversal signals, depending on the direction of the preceding trend and the position of the spinning top relative to the trend.
If the spinning top appears after an uptrend, it is considered bearish, and if it appears after a downtrend, it is considered bullish.
The small real body of the spinning top candlestick typically indicates that market participants are undecided about the direction of the trend.
The long upper and lower shadows suggest that there was significant buying and selling pressure during the period, but the lack of a definitive direction suggests that the balance of power is shifting between the bulls and the bears.
Significance Of Spinning Top Candlestick
To determine the significance of a spinning top, traders often look at the volume of trading activity during the period and the location of the spinning top relative to key support and resistance levels.
If the spinning top is located near a key level of support or resistance, it may indicate that the trend is about to reverse.
One important factor to consider when interpreting spinning top candlesticks is the context of the market. In a strong trending market, a spinning top may be a warning sign that the trend is starting to lose momentum.
However, in a range-bound market, spinning tops may indicate a period of consolidation before the market continues in its existing direction.
It is also important to consider other technical indicators and patterns, such as trend lines, moving averages, and momentum indicators, to confirm the potential reversal signaled by the spinning top.
Some traders may also use a combination of chart patterns and technical indicators to generate a more robust trading strategy.
How To Trade A Spinning Top Candlestick?
Strategy 1:
One popular strategy for trading spinning top candlesticks is to wait for confirmation of the reversal before entering a trade.
This can be done by waiting for a break of the high or low of the spinning top, or by waiting for the formation of a follow-up candle that confirms the reversal.
For example, if the spinning top is bearish and appears after an uptrend, a trader may wait for a bearish follow-up candle to form before entering a short position.
Strategy 2:
Another strategy is to use the spinning top as a trigger for a tighter stop-loss. For example, if a trader is already in a long position and a spinning top forms, they may adjust their stop-loss to a tighter level to reduce the risk of a potential reversal.
It is important to remember that spinning tops, like all technical analysis patterns, are not a guarantee of future market direction.
They should be used in conjunction with other technical and fundamental analysis techniques to generate a complete trading strategy.
Example Of A Spinning Top Candlestick Pattern
In the image above we can see a spinning top candle formed at the bottom of a downtrend and once the high point of the spinning top candle was crossed the market changed its trend and started moving upwards.
In the case above the spinning top candlestick pattern acted as a trend reversal.
In the image above we can clearly see that a spinning top was formed at the top of an uptrend and once the low of the spinning top candle was broken there was a clear change in the trend and the market started moving downwards.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In conclusion, a spinning top candlestick is a useful tool for traders to identify potential trend reversals.
By analyzing the real body, upper and lower shadows, volume, and location relative to key levels, traders can determine the significance of the pattern and use it to inform their trading decisions.
However, it is important to consider other technical indicators and market conditions when interpreting spinning top candlesticks.
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