Active traders should not trade instantly after the formation of a spinning top but rather wait for the confirmation from technical indicators after the formation of the next candle. It will help eliminate uncertainties in the market since the signal trend reversal will have been established. A spinning top is a single candlestick pattern which represents indecision about the future price movement. This candlestick pattern has a short real body with long upper and lower shadows of almost equal lengths.
Rickshaw Man Doji
In this chart, the price had a move down forming the pole of the flag. Entry was triggered when the price broke out of the flag and more importantly, closed above it. In this example, the price first had a superb move higher, forming the pole of the flag. Also, it is safe to assume that most traders are tracking more than one stock/pair. If you check any chart, you will see that the Spinning Top candlestick is very common. You already know that a market will cycle between periods of low volatility and high volatility.
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Yes, a Spinning Top Candlestick can appear in uptrends, downtrends, or sideways trends. However, its significance as a potential reversal signal is strongest when it appears after a prolonged uptrend or downtrend. The Spinning Top Candlestick can produce false signals, and its effectiveness can be influenced by market volatility. Therefore, it’s crucial to use it in conjunction with other technical indicators or fundamental analysis.
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A Spinning Top candlestick is characterized by its small body and long upper and lower shadows. The small body represents a close price that’s very close to the open price, signaling indecision between the buyers and the sellers. The long shadows, on the other hand, indicate that both bulls and bears were active during the period, but neither could secure a victory. It can occur after a bullish or bearish trend, signaling a potential reversal or a general sign of market indecision. Volume adds a second dimension to trading by showing the activity behind a price move.
Strategy #1: The flag strategy
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At this point, the candle will close, and a spinning top will appear. Explore the latest MetaTrader platform and access advanced trading features and tools. Conveniently access and manage all your trading accounts in one place. Receive $50 for you and your friend when you convert them into an active trader of ThinkMarkets. Partner with ThinkMarkets today to access full consulting services, promotional materials and your own budgets. Please note ThinkMarkets does not provide CFD services to residents of the US.
- However, according to some, the pattern shouldn’t be interpreted as a reversal pattern, but more like a general sign of indecision in the market.
- This means you can trade rising and falling markets to take action after both bullish and bearish spinning tops.
- Consequently, you should consider the information in light of your objectives, financial situation and needs.
While the spinning top on its own is believed to signal a reversal of the trend, it’s not enough to act on alone. You need additional filters and conditions to ensure that the odds are in your favor. However, according to some, the pattern shouldn’t be interpreted as a reversal pattern, but more like a general sign of indecision in the market. To completely validate a trend reversal, we also added Fibonacci levels from the highest to the lowest price levels of the prior trend.
Here, the price attempted to breakout above the previous swing high, but failed and reversed intraday, which served as an entry trigger. We will look to buy a failed breakdown at an important swing low or support zone, within the context of an overall uptrend. In this strategy as well, we’re looking at things within the context of the prevailing trend and will take trades only in the direction of the trend. Now, there is another interesting way in which we can use the spinning top candlesticks.
To execute trades based on the spinning top candlestick pattern, derivatives such as spread bets or CFDs offer viable options. In derivative trading, ownership of the underlying assets is not transferred; traders speculate on price fluctuations. Given its strong emphasis on market indecision, the Rickshaw Man Doji, like the basic Spinning Top, can signal potential trend reversals.
The spinning top illustrates a scenario where neither the seller nor the buyer has gained. For example, if you think a spinning top at the bottom of a downtrend could indicate an upcoming reversal, you could test the signal using the stochastic oscillator. This indicator can help you to predict price movements because it shows the speed and momentum of the market over a specific timeframe. If the upcoming reversal is confirmed, you may want to buy (go long).
If a candlestick pattern doesn’t indicate a change in market direction, it is what is known as a continuation pattern. These can help traders to identify a period of rest in the market, when there is market indecision or neutral price movement. A spinning top is an indecisive candle and explains high volatility and a tough fight between the bulls and the bears. It is formed when the bulls send the price higher than the opening price, and the bears then push it back down before the market closes, or vice versa.
The third spinning top is exceptionally large compared to the candles around it. It occurred after an advance and was followed by a large down candle. This ended up being a reversal candle, as the price proceeded lower. One should place a stop loss above or below the high/low of the spinning top when trading with it. Dojis are smaller; they have small real bodies and small upper and lower shadows, whereas the Spinning top has long upper and lower shadows.
Let’s assume you’re following Aston Martin’s share price, which opens the trading day at 442p. As sellers enter the market, the share price starts moving, hitting a low of 430p. Buyers start to push back, and the share price reaches a high of 455p before the market settles and the share price closes at 445p. This creates a bullish spinning top candlestick, as pictured below.
Spinning tops within ranges typically help confirm the range and the market’s indecision. Spinning tops within trends may be reversals signals, but the candle that follows needs to confirm. It consists of consecutive long green (or white) candles with small wicks, which open and close progressively higher than the previous day.
If you have read about the Doji pattern, you might be a little confused by now, since it closely resembles a spinning top. Then, join our Trade Together program for where we execute the strategy in live streams. When the breakout fails, the stops of all those who went long will be hit, and it will further add to the selling pressure.
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Our live streams are a great way to learn in a real-world environment, without the pressure and noise of trying to do it all yourself or listening to “Talking Heads” on social media or tv. This is an example of spinning tops forming consolidation on a weekly chart of $META. Spinning tops can happen in uptrends, downtrends, and consolidation areas that form bull and bear flags.
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However, traders usually seek additional confirmation before acting on this signal. These signals can come in various forms, such as a subsequent bearish or bullish candlestick, other technical indicators like the relative strength index (RSI), or fundamental news events. The bullish spinning top pattern occurs at the bottom of a downward trend and may signal a bullish trend reversal.
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A bullish bar adds confluence to this false break and serves as our entry trigger. Stoploss would be above the high of the flag as marked and this was followed by a good move lower. And since the price is trending, a continuation in the direction of the trend becomes more likely. Whereas a period of low volatility is when the market just pauses without making any meaningful moves.
The hammer candlestick pattern is formed of a short body with a long lower wick, and is found at the bottom of a downward trend. Before you start trading, it’s important to familiarise yourself with the basics of candlestick patterns and how they can inform your decisions. The indecision of the spinning top candlestick is a sign of an upcoming trend reversal. This indicator gauges market momentum and velocity within a specified timeframe, aiding in price movement predictions. Upon confirmation of the impending reversal, traders may initiate a long position hoping for an uptrend. The key interpretive value of a Spinning Top Candlestick is its illustration of market indecision.
In this chart, we have the perfect combo to enter a short-selling position – that is, spinning top pattern, double top pattern, and the intersection at the 61.8% Fibonacci level. In such a scenario, a trader will enter a long position with a stop-loss order at the lowest level of the spinning top candle or at the 78.6% level. As you can see, the market stopped exactly at the 61.8% Fibonacci level where the spinning top pattern was formed. We will look to short a failed breakout at an important swing high or resistance level, within the context of an overall downtrend. It went into a consolidation forming several Spinning Top candlesticks within the flag.
As such, you need to test the strategies and patterns you want to use, before trading real money. In this guide, you’ve learned not only how to identify a spinning top pattern, but also how you could go about to improve the accuracy of the pattern for real trading. One of our favorite indicators to define overbought and oversold conditions is the RSI indicator. The traditional interpretation is that readings above 70 signal an overbought market, and readings below 30 an oversold market. In our experience, the significance of a pattern can be greatly impacted by volume. Some patterns will work great when there is low volume, while others will only work in extremely high volume conditions.
Seeing one tells you the bulls and bears are really fighting it out – hence why the wicks are so big. So after one forms, watch for your typical signs of a reversal – pin bars, support and resistance, etc – as price could be gearing up for a large reversal. It is formed of a long red body, followed by three small green bodies, and another red body – the green candles are all contained within the range of the bearish bodies. It shows traders that the bulls do not have enough strength to reverse the trend.
Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Now that we have covered how you could improve the accuracy of a spinning top, we wanted to show you a couple of trading strategies. Another simple yet effective filter could be to demand that the close is the highest close five bars back for an overbought market, and the lowest close 5 bars back for an oversold market. The two patterns are nearly identical, with very small differences that in fact are negligible.
A Spinning Top Candlestick is a type of candlestick pattern characterized by a small body situated between long upper and lower wicks. This pattern signals a standoff between buyers and sellers, suggesting market indecision. The Spinning Top shows market indecision and hints at potential reversals, but these signals are not always reliable on their own. By using other technical indicators, traders can improve the reliability of the signals and make more informed trading decisions. There are a few ways to trade when you see the spinning top candlestick pattern.
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