Spinning Top Candlestick Pattern: How To Read Market Indecision
The equity market is driven by reliable buyer and seller sentiments, which decide whether the market indices will rise or fall. But there are moments when neither buying nor selling trends are strong enough to make the market move towards a particular direction. As a result, the market enters a limbo, guided by indecision. But how to capture these moments of doubts? Is there a tool or an analytical chart that can depict when market trends are weak and don’t show strong buying or selling trends? The answer is, yes! Traders look for a spinning top candlestick pattern to gauge the depth of market uncertainties. A spinning top candle can also mark the beginning of a trend reversal; but most significantly, it is an identifier of a situation when neither buyers nor sellers enjoy an advantage.
How To Identify A Spinning Top Candlestick
If you are trying to find a spinning top candle in the chart, look for a figure that is symmetrical with equal lengths of upper and lower shadows. The main body is relatively small in size depicting only a marginal difference between the opening and closing prices. Its unique appearance is due to market pull caused by both buyers and sellers. Buyers try to push the price up, whereas sellers try to lower it, but both fail to sustain the change. The result is a short-body candlestick with elongated shadows at either side. It may depict that the market players are losing confidence in the current trend, and a reversal is waiting just around the corner.
Understanding Spinning Top Candlestick
A spinning top pattern can occur after a robust buying or selling trend. It happens when, after a strong uptrend, buyers start to lose some control over the market, indicating a downward movement may be near.
Spinning top candlestick pattern shows uncertainties around an underlying asset. The shadows/wicks may not indicate any decisive trend reversal but can reveal valuable supporting information for trading strategy. It can appear anytime during bullish, bearish, or sideways movements.
A bullish spinning top is coloured green and bearish one, red. Different colours help them to identify separately in a candlestick chart.
When A Spinning Top Forms?
It forms when two opposite sentiments are equally strong, resulting in the same opening and closing prices. The price of the asset moves on either side during the period but closes near the opening price.
Spinning top candlestick is a part of the repository of Japanese candlestick patterns with distinctive features and appears following the same logic of Doji.
Spinning The Top: Developing A Trading Strategy Around It
Unlike Marubozu, which is another member of the Japanese candlestick family, spinning top patterns don’t give trading indications with specific entry or exit points. So, what to do when you spot a spinning top in the candlestick chart?
Spinning top forms when market trends are uncertain, but what transpired in the day when it appeared and what causes it to develop. To understand it let’s consider each of the following components separately.
Small real-body: The real-body of a candlestick shows the opening and closing prices of a day. A short real-body means, both opening and closing prices are very similar to each other. For instance, let’s assume that the opening price of an asset is Rs 210; it may close at a high of Rs 213 or a low rate of Rs 207. The differences are very narrow, resulting in a short real-body.
Upper wick: It connects the day’s high with the real body. If it’s a bull candle, the upper wick is connected to the close value.
Lower wick: It showcases the lowest point of the day. If it is a red candle or bearish candle, the lower shadow is connected to the close value. Conversely, if it is a bullish spinning top, then it connects the opening value of the real body.
Now if we consider only the upper or the lower portion separately, then we can say that both the bull and bear factors were futile to make the market move towards a single direction, resulting in market indecision.
Alone, a spinning top isn’t indicative of any trend. If bullish or bearish spinning top appears in a chart, the next candle must confirm the direction. When it happens, seasoned traders opt for wait-and-watch policy and don’t plan entry or exit until a trend is confirmed. They will not change their position or sentiment about the market until more revealing patterns appear in the chart.
Here is how to form a trading strategy around it.
- Be observant of a spinning top to appear
- Confirm market trends considering trend lines
- Wait for more candles to appear to indicate a trend reversal
- Place bids on the direction of the market
Spinning top candlestick pattern may not be a significant indicator in itself. But it is indicative of probable trend reversal and helps investors visualise when the market sentiment is shifting. It is, therefore, important to notice when a spinning top is appearing in a chart to avoid making a decision making error.