What Is a Spinning Top Candlestick Pattern?
In the world of technical analysis, candlestick patterns have long been relied upon by traders to uncover potential market trends and reversals. One such intriguing pattern is the spinning top candlestick pattern. With its distinct appearance and message of market indecision, understanding the spinning top candle pattern can be helpful for traders seeking to make informed decisions.
What Does a Spinning Top Candlestick Mean?
A spinning top is a candlestick pattern frequently used in financial market technical analysis. It includes a small body with long upper and lower shadows of approximately equal length. The candle’s body symbolises the discrepancy between the opening and closing prices during a specified time period, while the shadows indicate that volatility was high and neither bulls nor bears could take control of the market.
This pattern signifies market indecision, where neither buyers nor sellers have gained dominance. It suggests a state of equilibrium between supply and demand, with the price oscillating within a narrow range. Traders and analysts interpret this pattern as a possible indication of a trend reversal, implying a potential shift in the prevailing direction.
How to Do a Spinning Top Trading Analysis
To identify the pattern on a chart, traders follow these steps:
- Examine the candlestick: Look for a candle with a small body and upper and lower shadows of approximately equal length. The candle can be bullish or bearish.
- Compare with neighbouring candles: Compare it with the surrounding candles to understand its context within the price chart. Look for a series of candles indicating a trend or significant price movement. As the candle is usually used as an alert of a trend reversal, you can look for indicators and patterns that will strengthen this signal.
How to Trade the Spinning Top Pattern
When trading the pattern, you may consider the following rules for entry, take profit, and stop loss levels:
Entry
To enter a trade based on this pattern, wait for confirmation. This can be done by observing the price action after the spinning top candle forms. Look for a break above the candle's high (bullish spinning top) or below the low (bearish spinning top) to confirm the direction of the next price movement.
Take Profit
Determine your take profit level by examining nearby support and resistance areas on the chart. These levels can act as potential targets in which you anticipate the price to reverse or encounter obstacles.
Stop Loss
You may protect your trade with a stop-loss order. Place it beyond the opposite side of the formation, accounting for the candle's range and market volatility. By doing so, you may limit potential losses if the trade moves against your expectations.
Remember, trading decisions should not solely rely on this formation. It's crucial to consider additional technical indicators, market trends, and risk management principles when executing trades. The TickTrader trading platform allows traders to learn how to spot patterns on charts of different assets to trade them right away.
Live Example
In the EURUSD chart above, the spinning top candle appears at the bottom of a downtrend. A trader went long on the closing of the bullish candle that followed the spinning top. A take-profit target was placed at the closest resistance level, and a stop-loss was placed below the low of the spinning top candlestick.
However, there is another spinning top on the right. It formed in a solid downtrend; therefore, if a trader used it as a signal of a trend reversal, they would fail.
You can open an FXOpen account and adopt this formation to improve your trading approach.
Spinning Top vs Doji
The spinning top candlestick has a small body and upper and lower shadows of approximately equal lengths. It indicates market indecision, suggesting a balance between buyers and sellers without a clear dominant force. Traders interpret it as a potential reversal signal, signalling a possible change in the prevailing trend.
The doji candlestick, on the other hand, has a small body, where the opening and closing prices are very close or equal, resulting in a cross-like shape. It also represents market indecision but with a focus on the relationship between the opening and closing prices. Doji patterns indicate that buyers and sellers are in equilibrium, and a potential trend reversal or continuation may occur.
Spinning Top Candles: Drawbacks
This formation’s limitations are given below:
- Insufficient confirmation.
- Variable significance in different market conditions.
- Potential for false signals.
Overcoming the limitations:
- Seek confirmation from additional indicators.
- Analyse across multiple time frames.
- Combine with other patterns or key levels.
- Implement effective risk management.
Takeaway
The spinning top is a candlestick that reflects market indecision and suggests a potential reversal or consolidation. Traders use this pattern as a tool to identify areas of uncertainty in the market. However, it's important to consider the spinning top pattern within the broader context of the market and get confirmation from other analysis tools. If you want to test your spinning top candlestick trading strategy or apply it to a live chart, you can visit the FXOpen website and start trading right away!
FAQ
Is the spinning top bullish or bearish?
The spinning top can be bullish and bearish. Representing market indecision, it suggests a potential trend reversal at the end of a trend but needs confirmation from other indicators or patterns. The candle's significance depends on its context and overall market conditions.
What is a black spinning top?
A black (red) spinning top is a variation of the spinning top candlestick pattern with a small body and equal-length shadows. This is different from the white (green) spinning top, as its body is black, indicating a lower closing price. It suggests market indecision and a potential trend reversal. Traders analyse its context, technical factors, and confirmation from other indicators to interpret its significance.