No, we are not going to discuss the toy that comes with a string and spins rapidly. Instead, we are going to discuss the spinning top candlestick, which is quite different from the ones you see in top stock photos.
When it comes to learning about candlesticks, you can’t miss the spinning top candlestick because it tells you a lot more than you think. In this blog, we are going to share all that you should know about this candlestick so the next time you see it, you know what could be done.
So, without further ado, here is all you need to know:
What is the Spinning Top Candlestick?
A spinning top candlestick shares useful insights and indications regarding the current market situation for a particular stock. Though many traders around the world find it highly confusing, it is important that you must understand the basic signs and indications given by these candlesticks.
Let us start with the basics:
Features of the Spinning Top Candlestick
There are three components of any candlestick:
- The body, which is the solid central part
- The upper shadow, the vertical line sticking out of the upper part of the body. Its tip shows the highest price position of a candle
- The vertical line sticking out from the lower surface of the body is called the lower shadow. Its tip indicates the lowest price position
Closely observe the image of the spinning top candlestick. You will notice that the central solid shape of all spinning tops is quite small. Whereas, the upper and lower shadows are almost similar in length. In short, spinning tops have:
- a small body
- upper and lower shadow of almost the same size
Must-read: Candlestick patterns every trader should know
What do the Parts of Spinning Top Candlesticks Indicate?
A spinning top candlestick looks very simple but such a candlestick is created due to a combination of several dramatic events during the day. Therefore, several illustrations could be drawn from this humble-looking candle. Before we spin towards those illustrations, let us first understand what does each part of these sticks points to:
1. The Real Body
This part of the spinning top candlestick indicates that there is not much difference between the opening price and closing price of the stock.
For example, if the candle of stock in India opens at a price of Rs. 500 and closes at Rs. 506, the size of the candle will be very small. The candle will show a price motion of Rs. 6, which is very less for a stock priced at Rs. 500. So, the color of the spinning top will also not matter much.
2. The Upper Shadow
The presence of an upper shadow in a spinning top candlestick is a measure of the fact that the Bulls tried to move the price in an upward direction. However, they did not succeed in their attempts, and thus, the spinning top was formed.
3. The Lower Shadow
In the same way, the presence of a lower shadow in a spinning top candlestick is suggestive of the fact that the Bears tried to set the motion of the price in a downward direction. However, even they did not succeed in their attempts as it became more like a tug of war, where both the bulls and bears were pulling the rope with matching force.
What Does a Single Spinning Top Candlestick Tell You?
If we consider a spinning top in isolation and avoid the current pattern and whether the market is moving sideways or upwards, we will realize a single candlestick does not convey much sense.
In fact, a spinning top only shows that both the bulls and bears are interested in setting the motion of the price and pattern in their favor. Moreover, the spinning top also suggests indecision and friction as neither Bulls nor Bears were able to influence The market.
In the above chart, we can see the spinning top candlestick pattern pops up at the top of the uptrend. This indicates the indecision between buyer & sellers which leads to reversal. In simple words, the Spinning top tells traders that there are chances of a possible reversal or continuation trend. But you must confirm it using other technical indicators.
Here is a list: Technical Analysis Indicators
Significance of Spinning Tops During Downtrend & Uptrend
When you look at a spinning top in reference to the market trend, you are sure to get useful insights that will help you take a stance:
1. Spinning Tops When the Stock is in Downtrend
What do Spinning Tops in a Downtrend Mean?
A spinning top could mean one of the two things:
- The bears are consolidating their position and they will try to see if the price falls further through another round of selling
- The bears are trying to hold their positions but the bulls are trying to push the price upwards
What Could be the Probable Outcome of Spinning Tops in a Downtrend?
A spinning top in a downtrend can have two probable outcomes:
- The prices could fall further as there will be another round of selling
- The spinning top also suggests that there could be a reversal in the market and the price could go up
What should be Your Stance as a Trader?
The point is that the price will either roll and slide or it will rise upright.
A Word of Advice
Don’t head for the first thing that your fingers tap on to. Take your time to analyze the pattern and invest only a fractional amount to get a better idea of the motion set forth by the spinning top. It would be better if you do not rely solely on the spinning tops for your trading decisions.
2. Spinning Tops When the Stock is in Uptrend
What do Spinning Tops in an Uptrend Indicate?
A spinning top could mean one of the two things:
- The bulls are consolidating and they might want to surface another round of buying
- The spinning top also indicates that the bulls are fatigued and gives bears a chance to enter
What Could be the Probable Outcome of Spinning Tops in an Uptrend?
As it appears, a spinning top in an uptrend can have two probable outcomes:
- The spinning top could mean that the prices may rise
- There could be a correction and the prices might fall
What should be Your Stance as a Trader?
When you see a spinning top, there are 50-50 chances of both outcomes and you should be prepared for either of them. However, try to minimize your losses by investing only half of what you plan to invest.
A Word of Advice
There is no doubt that stock trading is fun, but trading on the basis of the spinning top could be a bit tricky. It is, therefore, suggested to try and understand what might have triggered the formation of a spinning top in a bullish trend and make your move accordingly.
Also, calculate the losses that you can easily bear in case the spinning top gives an outcome that does not match up with your expectations. Then, invest based on your calculations. Don’t forget to set the “stop-loss”. So, just turn on the music and try to strike a positive balance in your trade.
Conclusion
Consider the spinning top as “the calm before the storm”. The market could go in any direction in the future and, therefore, you should be very careful before you move forward with any trade. After all, you aim to rope in profits.
If you have any questions, feel free to get in touch with us.
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