There are several tools and indicators that technical traders can use to make informed decisions on trade entries and exits. Commonly, traders are looking for any kind of chart pattern that may indicate a reversal in a financial asset’s price momentum. One such pattern is the bullish/bearish spinning top pattern in candlestick trading.
Bullish/bearish spinning top pattern in candlestick trading is used to identify price trends that are running out of steam, perhaps giving signs of an imminent reversal. When formed on a candlestick chart, these patterns look very much like the spinning tops played with by children, with a small real body balanced between two long wicks.
Both bullish and bearish spinning top patterns point to slowing in a financial asset’s price momentum, with neither bulls nor bears able to get a distinct advantage during a session. Thus, there is a small real body indicating an open and close price very near one another. The long wicks on either side of the body indicate moments of advantage for each side throughout the session.
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Table of Contents
Types of Spinning Top Candlestick Patterns
Spinning tops are closely related to doji patterns, which also help indicate trends that are losing steam and indecision in the market. However, the spinning top is distinguished by a slightly longer real body and much longer wicks, with spinning tops being either bullish or bearish in nature.
Bullish Spinning Top Pattern
A bullish spinning top pattern is a potential indicator of a reversal in a financial asset’s prevailing downtrend. It will be a small, green candle (closing price higher than the opening price, albeit slightly) after a succession of red candles, characterized by long wicks above and below, making for a highly symmetrical candle.
Bearish Spinning Top Pattern
A bearish spinning top pattern is essentially the reverse of a bullish spinning top pattern, with the spinning top occurring at the top of a prevailing uptrend in a financial asset’s price. It will be a small, red candle (closing price lower than the opening price, albeit slightly) after a succession of green candles, with the same long wicks above and below, forming a highly symmetrical candle.
How to Identify Spinning Top Patterns in Candlestick Trading?
It is relatively easy to spot spinning top patterns when looking at a candlestick chart, as they usually come at the end of prevailing uptrends or downtrends. Any small-body candles after a succession of long-body candles should alert you to the formation of a spinning top pattern.
Construction of Spinning Top Pattern
Spinning top patterns, both bullish and bearish, form at the end of a strong prevailing trend, indicating indecision as to the future direction of a financial asset’s price.
While the spinning top is formed of only one candle by itself, most traders who like to use spinning tops like to see a subsequent confirmation candle, which would be a candle that continues with the bullish or bearish reversal that the spinning top is thought to have predicted.
Key Characteristics of Spinning Top Pattern
Spinning top patterns are characterized by candles that have small real bodies and long wicks. The long wicks will be the main distinguishing feature that separates them from doji patterns. Spinning top patterns are also very symmetrical, with upper and lower wicks of roughly the same length.
Bullish candlestick patterns will be green, with closing prices slightly higher than opening prices; bearish candlestick patterns will be red, with closing prices slightly lower than opening prices.
How to Interpret the Spinning Top Pattern?
Once the spinning top pattern, both bullish and bearish, has been identified, traders can glean the following information about a financial asset’s price:
- There is indecision in the market, as the real short body of the candle denotes an opening and closing price that are very similar.
- The long wicks mean that neither the bulls nor the bears were able to end the session with the stronghold that they had at one point, further confirming the indecision in the market.
- This indecision could mean that a prevailing trend is running out of steam, and a reversal of a financial asset’s price could be imminent.
How to Improve the Reliability of Spinning Top Pattern in Candlestick Trading?
Like many other technical analysis tools and indicators, spinning top patterns are not necessarily reliable on their own. One reason that spinning top patterns are not reliable is that there are so many of them on a candlestick chart, with few of them indicating an actual reversal in a financial asset’s performance.
One specific tool to pair with spinning tops to improve reliability is moving average convergence/divergence (MACD).
MACD is excellent at predicting reversals when the price is making new highs or lows, but the MACD line is moving in the opposite direction. Therefore, when this massive diversion between the MACD line and the actual price coincides with the formation of a spinning top, the trader can feel very confident that a reversal in a trend is about to take place.
How to Trade Spinning Top Pattern in Candlestick Trading?
Now that you have an idea about how to locate spinning tops and how to interpret them, it is time to utilize that knowledge to make profitable trades. When using the following strategies, assume that there is a strong divergence between the price performance and the MACD indicators and use the formation of spinning tops to help make informed trade decisions.
Strategy 1: Reversal Trade Strategy
The reversal trade strategy is used to enter trades when the trader feels like the market is due for a correction. In general, the spinning top is an excellent pattern to use to help form the basis for reversal trades.
- Market Environment – The market is in a period of extended uptrend or downtrend.
- Identify and Confirm Trade Opportunity – The trader will notice the formation of the spinning top, followed by a confirmation candle to help verify that a reversal is forming. Strong divergence in the MACD should also exist.
- Determine Trade Entry, Stop-Loss, and Take Profit Levels – Trades should be entered after the confirmation candle has formed. Stop-loss should be set if a spinning top in the opposite direction forms, indicating continued indecision in the market. Take profit levels will vary based on risk tolerance, but 10% is a good target if a real reversal has occurred, with perhaps a 5% profit acceptable for scallops and day traders.
- Execute and Manage Trade – Closely monitor the MACD while you hold your position. If the MACD ever crosses over, quickly abandon your position and do not wait to hit your profit target.
Advantages and Limitations of Trading Spinning Top Pattern
While many of the advantages and limitations of bullish/bearish spinning top patterns have been discussed, the following section breaks them down into more digestible chunks.
Advantages of Trading Spinning Top Pattern
Listed below are the primary advantages of trading the Spinning Top Patterns –
- They are easily identifiable by their short, real bodies and long, symmetrical wicks.
- They successfully indicate market indecision and the slowing of momentum.
- They work well with other technical analysis tools, specifically MACD.
Limitations of Trading Spinning Top Pattern
Listed below are the primary limitations of trading the Spinning Top Patterns –
- Many spinning tops form on a candlestick chart, making it dubious to trust them as surefire indicators.
- Rather than indicate a reversal, a spinning top may just indicate a slow session of trading.
- They have little stand-alone value.
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Conclusion
Of the many tools and indicators used by technical traders, bullish/bearish spinning top patterns in technical trading are some of the most prevalent.
Easily identifiable at the end of strong trends due to their short, real bodies and long, symmetrical wicks, spinning tops help traders identify the slowing of momentum and indecision in the market.
When used with other technical analysis tools, specifically MACD, spinning tops can help traders optimize their buy-in point for trading reversals.
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