Spinning Top Candlestick Pattern Trading Strategy Analysis and Backtest Definition & Meaning

spinning top candlestick

Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. Both patterns frequently occur and can be used to warn of a reversal after a strong price move.

How to Trade the Spinning Top Candle

An exit signal would be generated when you get a close below (for bull flags) or above (for bear flags) the 20 SMA. In this strategy, we will incorporate the Spinning Top candlestick, into the classical flag pattern. The Spinning Top candlestick is a pattern, that has to be viewed in the context of the overall market conditions.

spinning top candlestick

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Generally, when securities like stocks have gone too far in one direction, they tend to revert back. Following this, we might only want to take a trade if the market is overbought or oversold, depending on if you’re going short or long. So, in this case, a spinning top signals that an extended period where selling pressure prevailed might be coming to an end. As the market is trending down, the market sentiment is bearish, and most people anticipate that it will continue to go down for some more time. However, since the market has gone down for an extended period of time, buying pressure starts to increase, in the hope that a market reversal is imminent. Well, when a Spinning Top candlestick forms when the price is trying to breakout/breakdown, it tells us that there is still indecision and the break in price lacks conviction.

Bullish Spinning Top (Bottom) Candlestick Pattern

Assessing the reward potential of a spinning top trade is also difficult since the candlestick pattern doesn’t provide a price target or exit plan. Traders need to utilize other candlestick patterns, strategies, or indicators to find a profitable exit. Spinning tops are a sign of indecision in the asset; the long upper and lower shadows indicate there wasn’t a meaningful change in price between the open and close. The bulls sent the price sharply higher and the bears sent the price sharply lower, but in the end, the price closed near where it opened.

Deepen your knowledge of technical analysis indicators and hone your skills as a trader. As for forecasting reversals, the common nature of spinning tops also makes this problematic. Confirmation is required, but even with confirmation, there is no assurance the price will continue in the new direction. Usually, the market will gap slightly higher on opening and rally to an intra-day high before closing at a price just above the open – like a star falling to the ground. The hanging man is the bearish equivalent of a hammer; it has the same shape but forms at the end of an uptrend.

If a spinning top is formed, it means that the market has explored upward and downward options but then settles at more or less the same opening price – resulting in no meaningful change. Spinning top candlesticks are typically small candlesticks with a bigger real body found on stock charts near both support and resistance levels and signal indecision. The pattern is marked by small bodies and long upper and lower shadows, illustrate market indecision. In an uptrend, a spinning top forms, signaling potential bullish exhaustion. In conclusion, the Spinning Top candlestick is a useful pattern that signals market indecision. By understanding its formation and trading it effectively, you can enhance your trading strategy and potentially maximize your profits.

Live traders should not look to enter a trade immediately after the Spinning Top has formed, but rather delay the trade to wait for confirmation. Confirmation can come from technical indicators, fundamental factors or oscillators as seen using a stochastic oscillator. The stochastic re-confirms a short entry as indicated by the blue circle. For instance, if a spinning top appears at the downtrend’s end, suggesting a potential reversal, traders might use the stochastic oscillator to validate the signal.

While the spinning top candlestick provides valuable market insights, it’s important to use it in conjunction with other technical indicators. Traders often use additional technical analysis tools or fundamental analysis to confirm the signals given by the Spinning Top. Opposite to the Gravestone Doji, the Dragonfly Doji has a long lower wick and no upper wick. By seeking additional confirmation, traders can make more informed decisions and increase their likelihood of successful trades. Confirmation signals help increase the reliability of the potential reversal indicated by a Spinning Top. The close proximity of the open and close prices, along with the long wicks, highlights the uncertainty prevailing in the market.

Indeed, in the example above, this spinning top bearish pattern signals a trend reversal, and immediately after the next candle, a bearish trend begins. A spinning top tells traders that there is uncertainty in the market, because there wasn’t much of a change between the opening and closing price. This can either mean that more neutral movements are ahead, or a price reversal is about to occur. The tops tell you buyers or sellers are firstly interested in wanting price to reverse – why else would they start battling the other side? – and secondly, that a reversal signal could be near… not necessarily on the next candle, but within a short space of time on the time-frame you’re watching.

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Traders often look for additional confirmation, such as a subsequent bearish candle following a Spinning Top in an uptrend, or a bullish candle following a Spinning Top in a downtrend. Overbought and oversold conditions can be identified using indicators like RSI or by considering the highest/lowest close over a certain number of bars. The effectiveness of spinning top patterns may vary based on the timeframe and market conditions. Now, there might be that single trading strategies work better or worse on certain days, but you could also look at the general tendency of the market itself. A spinning top is traditionally seen as a form of reversal pattern that occurs after a bullish or bearish trend. Below, we are going to show you the two types of spinning top patterns combined with Fibonacci support and resistance levels – bullish and bearish spinning top patterns.

This showed the tug of war between the bulls and bears taking control of price action. The most common method used by technical traders to confirm a trend reversal is waiting for the formation of the succeeding candle. Using the example above, the succeeding candle should close lower than the wick of the Spinning Top. Without this confirmation, the signal of trend reversal may not be established, and uncertainty remains in the market. This resulted in the closing price reverting back/very close to the opening price. Join us as we look into this valuable candlestick formation and use its potential to help you capture opportunities on the markets.

Market volatility can also affect the reliability of the Spinning Top. In highly volatile markets, Spinning Tops can appear frequently, but they might not always signify meaningful reversals. This possibility underscores the importance of seeking additional confirmation signals and not relying solely on the Spinning Top. Other technical indicators or fundamental analysis can also provide supportive evidence. This arrangement suggests extreme indecision in the market, with neither buyers nor sellers able to gain the upper hand.

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Trading on spinning tops presents challenges due to their ambiguous nature. Determining stop loss and take profit levels can be difficult, as these patterns offer limited guidance. Traders and investors should seek further confirmation from subsequent candles, or complementary technical indicators, to substantiate the possibility of a trend change.

If it is a red candle, then the high and open are connected, and if it is a green candle, then the high and close are connected. But it gives us useful information about the current scenario of the market. We are opposed to charging ridiculous amounts to access experience and quality information. Also, we provide you with free options courses that teach you how to implement our trades as well.

A spinning top is a one-candle reversal pattern that signals uncertainty in the market, and is preceded by either an uptrend or downtrend. As to its appearance, a spinning top has a small body that closes in the middle of the candle’s range, with long wicks to both sides. As a neutral candlestick pattern, the spinning top can be formed in charts in different scenarios.

The spinning top candlesticks are indecision candles because the upper and lower wicks did not affect meaningful price changes. A spinning top indicates exhaustion after a cycle of uptrends or downtrends price pattern. The gap between the opening price and closing price means that no progress was achieved during the timeframe of the candle. The long upper and lower wick displays a higher level of volatility that occurred during the trading period, with neither bulls nor bears dominating. The idea behind indecision manifested in the market throughout the formation of the spinning top is that buyers and sellers move prices higher and lower during the trading process. It causes the closing price to reverse back closer to the opening price, and the bull trader forces it back to the top before the market closes.

  1. If you don’t feel ready to trade on live markets, you can develop your skills in a risk-free environment by opening an IG demo account.
  2. Traders need to utilize other candlestick patterns, strategies, or indicators to find a profitable exit.
  3. They are commonly formed by the opening, high, low, and closing prices of a financial instrument.
  4. In conclusion, understanding candlestick patterns like the spinning top is crucial for informed trading decisions.

Its structure offers a glimpse into the market’s indecision, providing traders with potential trading opportunities across various periods. Like any trading tool, the Spinning Top Candlestick pattern can produce false signals. Sometimes, a Spinning Top may form, indicating potential reversal, but the market continues in its previous trend. Spinning Top Candlesticks can serve as signals for both trade entry and exit. When a Spinning Top forms at the end of an uptrend, it could serve as a signal to exit long positions or enter short positions, anticipating a potential fall in prices. Incorporating Spinning Top Candlestick patterns into a trading strategy also offers an opportunity for effective risk management.

While spinning tops are a prevalent candlestick pattern, they are most effectively used alongside other technical analysis tools. Confirmation of this candlestick pattern occurs when the next candle. If after an uptrend, a spinning top is formed, the next candle closing below the low of the spinning top candle will confirm a possible bearish reversal. If after a downtrend trend, a spinning top is formed, the next candle closing above the high of the spinning top candle will confirm a possible bullish reversal.

Spinning tops frequently occur when the price is already moving sideways or is about to start. Three-method formation patterns are used to predict the continuation of a current trend, be it bearish or bullish. Traders interpret this pattern as the start of a bearish downtrend, as the sellers have overtaken the buyers during three successive trading days. It signifies a peak or slowdown of price movement, and is a sign of an impending market downturn. The lower the second candle goes, the more significant the trend is likely to be.

These spinning tops can signal a reversal may soon begin, but DO NOT take them as entry signals. Most of the time, they form at market turning points, usually near a recent high or low. This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion.

The upper shadow tells us that the bulls did attempt to take the prices of the stock higher, but they failed in doing so. For instance, if the open price is Rs. 320, and the closing price is Rs. 324, then this will lead to the creation of a small real body as a 4-point move is not much. The upper shadow connects the highest price of the day with the real body. If the closing price is above the opening price, then normally a green or hollow candlestick (white with black outline) is shown. If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn.

Similarly, a spinning top at the bottom of a downtrend could signal that bears are losing control and bulls may take the reins. There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.

The closeness of these prices indicates a balance between the buying and selling pressures. Despite the price swings during the session, the market essentially closed near where it opened. However, the long upper and lower wicks show a wide range of prices were tested during the trading session. The volatility of the market could have a great impact on price patterns and their accuracy. Sometimes a pattern will only work in a highly volatile market, while the opposite sometimes holds true as well.

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We’ll use ADX to measure the trend strength, and require that it shows a reading of 20 or more, AND that the current reading is higher than that five bars ago. Wish success to your ways always sir.My preview refuse to work that’s why I’m using comment to share my experience. When a breakdown fails, all those who shorted at the breakdown will see their stops getting hit and start covering their shorts, which further adds to the upward momentum. The entry could have been taken just before the close, or at the next day’s opening. I argue that it takes more than a single candle to reverse a whole trend.

When used appropriately and in combination with other market signals, Spinning Top Candlesticks can be incredibly insightful for market participants. What matters is the relatively equal extent of the wicks, signifying the balance of power between the buying and selling forces. The location of the body—whether near the top, middle, or bottom of the range—doesn’t significantly impact the pattern’s interpretation. The Rickshaw Man Doji, also a Spinning Top variant, has a long upper and lower wick with the open and close prices situated precisely in the middle.

In the chart below, the spinning top pattern occurs at the end of an uptrend after the second double top. Therefore, in this example, we can see a combination of the spinning top pattern and the double top pattern. As you can see in the USD/CHF 1H chart above, the spinning top chart pattern appears at the top of a trend and has the following features – small body, long upper and lower shadows.