Candlesticks with a spinning top feature a short body and two long wicks. They show a scenario in which neither the seller nor the buyer benefits, i.e., starting and closing prices are equal. A spinning top candlestick may also signal reversal, especially following a price drop. This article explains everything about this type of candle, including differences from Doji, examples, and limits.
What is a spinning top candle?
A spinning top is a candlestick design with a very short body centered vertically between extended upper and lower shadows. The pattern shows uncertainty about the asset’s future path. It means that neither buyers nor sellers will have an advantage.
A candlestick pattern occurs when buyers drive the price up over a certain period, and sellers drive the price down during the same period, but the closing price ends up very near to the open. A spinning top candle may signal a price reversal if the next one confirms a large price move in either direction. Close prices might be higher or lower than open ones, but these extremes are always relative to one another.
Note! There are several types of candles. For instance, the high wave is a special kind of spinning top basic candle with one or two very long shadows.
What does a spinning top candle mean?
A spinning tops candle indicates uncertainty in the asset price, while long upper and lower shadows indicate little change in value from the opening to closing prices. The price moved up as bulls pushed it higher and down as bears pushed it lower, but ultimately settled at its opening level. This ambiguity might foreshadow further lateral motion, especially if the tossing occurs within a narrow band. Also, it can indicate a potential price reversal if it comes after its increase or decrease.
The candle is an indicator of a major trend change and may be a red flag at the pinnacle of an uptrend. In a similar vein, a spinning top candle at the bottom of a downtrend can have meaning that bulls are gaining control.
No matter the case, having something to back up the spinning top’s pattern is helpful. It can be proved by the next candle. A forex trader who spots a spinning top candle at the end of an upswing may expect a reversal to the downside, which would be shown by a subsequent price drop in the candle that follows the spinning top one. If it doesn’t, then the trader will need to wait for a new signal. If the tossing occurs inside the range, it shows that uncertainty persists and the range is likely to be maintained. To confirm, the following candle should move sideways inside the current channel.
Candles with a spinning top are best when used in tandem with other methods of technical analysis. Indicators like the Moving Average Convergence-Divergence (MACD) or Relative Strength Index (RSI) help check for reversal indications before initiating a trade based on a spinning top candle formation.
Example of spinning top candlestick
The importance of establishing a strategy and managing risk while following the pattern becomes much more apparent when trading with candlesticks. The sample chart features many spinning tops candle. The pattern on the left takes place when the price is reduced a little. A further downward candle suggests the price decline will persist. The price falls only slightly before turning back up.
When a certain distance is reached, the second top spins. That the price is now fluctuating in a tight range shows the market’s current hesitance.
When compared to the other candles, the third spinning top appears gigantic. After the price moved up, a large down candle formed immediately after. A reversal pattern formed as the price fell.
The falling price brought about the appearance of yet another top that spins rapidly. The next candle gapped down and continued to fall after a brief respite.
Note! Spinning top candle formation within range is often taken as its confirmation and market uncertainty. Even if a spinning top inside a trend can be a reversal signal, it has to be confirmed by the next candle.
The distinction between a spinning top candle and a Doji
Spinning top candles and Dojis both talk about indecision. The first casts long upper and lower shadows while Doji has small real body and small upper and lower shadows. These two formations are common and can represent a reversal in price after its significant shift.
Both types of candlesticks heavily depend on supporting data. A strong move after the spinning top or Doji is a bigger signal of a new potential price direction than the candles themselves.
The limitations of spinning top candles
Reversal forecasts can be challenging because many tops can only spin in one direction. Even if the price moves in a different direction after confirmation, that doesn’t mean it will stay there.
As an additional challenge, setting a stop loss of or below the high or low of a spinning top may expose you to a level of risk that is disproportionate to the potential reward.
Since the candlestick pattern shows neither a price target nor an exit plan, estimating how much you can earn from it is especially challenging. To find a profitable exit, traders need to use additional candlestick patterns and strategies.