How to Read and Trade the Spinning Top Candlestick Pattern

In stock trading, chart patterns can help you understand stock prices. One such chart pattern is the spinning top candlestick. The meaning of the spinning top candlestick is that both the buyers and sellers are active in the market. The prices fluctuate due to the activities of both buyers and sellers, especially when neither can gain an edge over the other.

Read on to learn in detail about what is spinning top candlestick pattern.

What Is A Spinning Top Candlestick Pattern?

A spinning top candlestick represents uncertainty in the market. It is created by buyers who drive prices up and sellers who drive prices down on the same day.

The candlestick has a small body and long upper and lower wicks. This implies that the prices at which the positions were opened and closed were close to one another, despite the high price fluctuations throughout the day. The meaning of a spinning top candlestick is very simple. The candlestick represents that no one is in control. As a result, one waits for the next candle to establish the direction.

How To Identify A Spinning Top Candlestick Pattern?

A spinning top candle pattern can be identified on a price chart because it has a small body with longer upper and lower shadows. This implies that the stock opens and closes at almost the same point.

During the trading session, the stock fluctuates, both increasing and declining. However, the stock ended the session near the point at which it started. This implies that the stock was not controlled by either the buyers or the sellers.

A spinning top candle chart forms when the market is not sure which direction the stock is headed. The traders wait for the stock to move a few more candles before making any decisions.

Bullish Spinning Top Vs Bearish Spinning Top

A spinning top candlestick can occur in both a rising and a falling market. The meaning depends on the trend that occurred before the formation of the candlestick.

A bullish spinning top candlestick formation usually follows a downtrend. It indicates that the downtrend might be losing momentum. It means that buyers are entering the market, but the trend has not changed yet.

A bearish spinning top candlestick formation usually follows an uptrend. It indicates that the uptrend might be losing momentum, showcasing that the sellers are entering the market and pushing prices down. The trend is changing, and the direction is no longer certain.

It is important to note that although the spinning top candlestick formation indicates a potential shift in momentum, the decision to buy or sell should only be taken after the formation of the next candle.

Spinning Top Candlestick Pattern - Real Example

Let’s consider a simple example of a spinning top candlestick pattern.

Assume a stock has an opening price of ₹100. During the day, the stock’s price rises due to the efforts of buyers and reaches ₹110. Later in the day, the price drops to ₹90 due to the efforts of the sellers.

Finally, the stock’s price ends the day near ₹100. Despite the fluctuations in the stock’s price during the day, the stock’s opening and closing prices remained almost the same. Such a candlestick pattern is known as a spinning top candle.

The above example indicates that both buyers and sellers were active during the day. The efforts of both parties were equal, but neither could influence the stock’s price. Hence, in such a situation, one should wait for the next day.

Advantages Of The Spinning Top Candlestick Pattern

The use of the spinning top candlestick chart can be valuable for a trader who wishes to get insight into how the market behaves. The advantages associated with the use of the spinning top candlestick chart include:

• It indicates that the market is in a state of indecision. The chart effectively illustrates that the market is characterised by the presence of both buyers and sellers, but that none of them has the upper hand.

• It is useful in identifying a potential trend change. The use of the candlestick chart for spinning top can be effective in identifying a potential trend change if the pattern appears during a strong trend.

• It is easy to identify in a chart. The candlestick chart for the spinning top has a small body and a long upper and lower wick. The simplicity associated with the chart makes it easy for a trader to identify the pattern in a chart.

• It can be used across different time frames. The candlestick chart for the spinning top can appear in an intraday chart, a daily chart, or a weekly chart.

Limitations Of The Spinning Top Candlestick Pattern

Although the spinning top candlestick pattern can be useful, there are a few disadvantages, which are as follows:

• Not a clear signal: A spinning top candlestick pattern is generally a signal of confusion in the stock market. It does not give a clear signal of whether the stock price will rise or fall.

• Requires confirmation: A spinning top candlestick pattern is generally followed by the next candle before any action is taken on the stock market.

• Appears often: Spinning top candlestick patterns can appear frequently on the stock charts. Sometimes, the spinning top candlestick pattern is not followed by any major movement of the stock price.

• Depends on the market trend: A spinning top candlestick pattern depends on the trend that was prevalent before the spinning top candle was formed. Without looking at the trend, the spinning top candle can give a wrong signal.

Common Mistakes Traders Make With The Spinning Top Pattern

Many traders who see a spinning top candlestick assume that the market will reverse direction immediately. The reality is that the candlestick is simply indicating uncertainty. Without proper analysis, incorrect decisions can be made. Some common mistakes made by traders are:

• Making assumptions that it always means a reversal. The spinning top candlestick does not always mean that the market is about to reverse direction. Instead, it means that the sellers are balanced by the buyers.

• Not taking into consideration the overall trend. The significance of the spinning top candlestick is based on the trend before it appears. Without considering the trend, incorrect decisions can be made.

• Not waiting for confirmation. There are times when traders react immediately to the candlestick patterns of the spinning top. However, it is better to wait for the next candle before making any decisions.

• Not using any other indicators. The spinning top candlestick can be used alone by many traders. However, it is better to combine it with other technical indicators to have a better view of the market.

Conclusion

The spinning top candlestick pattern highlights where buyers and sellers remain balanced in the market. Although it does depict a shift in momentum of the market, it does not guarantee a trend reversal. Thus, you must not solely rely on spinning top candlestick patterns to make crucial trading decisions. It is always advised that you rely on broader market trends and wait for confirmation of the same.

Source:

Investopedia