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The equity market is prone to high degrees of influence from bulls and bears.
When the bulls dominate, the prices increase, creating an uptrend in the market.
When the bears dominate, the prices decrease, forming a downtrend market.
The spinning top candlestick pattern is an indication of such market indecisions.
What is the spinning top candle?
When both bulls and bears cannot control the market, stock prices move sideways. The absence of dominance makes this market non-trending.
A candle with a short body and equally long wicks on both ends is called a spinning top candlestick pattern.
How is the spinning top candlestick formed?
The spinning top candlestick sometimes forms at the top of the chart and sometimes at the bottom. The one formed at the bottom is also called the spinning bottom candle.
When there is equal pressure from the bulls and bears to take the prices up and down, respectively, but none succeed, the stock closes near the opening price.
This forms a small body and long wicks on the upper and lower ends of the candle.
Interpreting the spinning top pattern
Let us consider an example to understand the interpretation of this candlestick better.
Stock ABC opens at ₹ 100 today.
A set of bullish traders who speculate on a rise in its price aggressively start buying before the prices increase further.
It increases the demand for the stock, and the price goes up to ₹ 112.
Another set of traders who are pessimistic about ABC’s prices go bearish and start selling their stocks with the same level of aggression.
The supply increases, bringing the prices down to ₹ 83.
Both bulls and bears continue to exert pressure but fail to sustain. The price finally closes at ₹ 95, near the opening price of ₹ 100.
A spinning top candle forms here because:
- The opening and closing prices are near, which forms a small body. (Difference of ₹ 5)
- The high and low prices are far from the opening and closing prices, forming long wicks on both ends. (Difference of ₹ 12 on both sides)
This represents a market of uncertainty where nobody can impact the price movements in one specific direction.
Hence, the spinning top candle, is an indicator of indecision rather than reversals.
Bullish spinning top candlestick pattern
When the closing prices are greater than the opening prices, it forms a bullish spinning top candlestick.
These candles are usually green in colour.
Bullish candles are sometimes found at the bottom of a downtrend, which may indicate a bullish reversal.
Bearish spinning top candle
When the closing prices are lower than the opening prices in the spinning top candlestick, it is a bearish candle.
These are generally red in colour.
Bearish candles found on top of uptrends may indicate a potential bearish reversal.
Trading strategies
Bullish traders can take their positions when the spinning top candle appears after a downtrend, and the reversal is confirmed by the following candle.
Stop loss point – The lowest price point of the spinning top candle.
Entering the long position – When prices exceed the highest price point of the spinning top candle.
Bearish traders can go short when the spinning top candle appears after an uptrend, and the following candle confirms the reversal.
Stop loss point – The highest point of the spinning top candle.
Entering the short position – Based on the tip of the lower wick.
Case study
Below is a sample of the monthly candlestick chart of Reliance Industries.
The arrows point to spinning top candlesticks.
You may notice that the spinning top candles can form at the top and the bottom of the charts.
While one of them shows a reversal, the others do not.
Bottomline
The spinning top candlesticks form when the market is indecisive. The market, not following a particular trend is quite a regular scenario. It leads to the frequent appearance of the spinning top candle on the candlestick charts.
The spinning top pattern, as an individual tool, is not very useful. Combining it with other technical indicators may give better results while analysing market trends.
The spinning top candle looks similar to a doji candle. However, the doji candle has a thinner body and smaller wicks as compared to the size of the spinning top candle.
It requires regular practice to differentiate the spinning top from other candles and use it as a tool for technical analysis.
FAQs
The difference between a bullish and bearish spinning top lies in the closing price relative to the opening price. A bullish spinning top closes slightly higher than its opening price, indicating a slight advantage to buyers. Conversely, a bearish spinning top closes slightly lower, suggesting a minor edge for sellers. Both patterns feature small real bodies with long upper and lower shadows, signifying market indecision.
After a spinning top candlestick, the market may experience more sideways movement, especially if the pattern occurs within a range. It can also signal a potential price reversal if it follows a significant price advance or decline. However, the subsequent candle must confirm the direction; without confirmation, the spinning top alone does not guarantee a change in trend.
To trade a bearish spinning top, one should wait for confirmation from the next candle. If the following candle closes lower, it may confirm a potential downtrend, and traders might consider entering a short position. However, it’s crucial to use this pattern in conjunction with other technical indicators and risk management strategies to validate the trade.
The spinning top strategy involves identifying the pattern, which signals market indecision, and then waiting for the next candle to confirm the direction. A spinning top after an uptrend may indicate a potential reversal to the downside, while one after a downtrend could suggest a reversal to the upside. Traders use this pattern to anticipate potential trend changes and plan their entries and exits accordingly.
A successful spinning top candlestick pattern is one that accurately signals a potential reversal or continuation of the trend. Its effectiveness is enhanced when it forms after a clear price trend and is accompanied by high trading volume. The pattern’s reliability increases when confirmed by subsequent candles and when used in conjunction with other technical analysis tools.