A chart pattern, properly understood and confirmed, can give you a huge leg up on the competition – but first, you have to develop the know-how.
Understanding market sentiment is a tall order – there are countless factors at play, but there is a way to neatly summarize those factors, and they are called chart patterns.
These easily-spottable configurations of shapes can go a long way in pointing us in the right direction. Because of the benefits of historical data and backtesting, this method of analysis has become more accurate than ever – telling us which patterns are a green light for trading and which are a sign to run.
Today’s topic will be the spinning top candle – the #1 most common candlestick pattern. It is a sign of indecision – indicating that while there is action going on, neither the bears nor the bulls prevailed during a certain period.
That moment of indecision can be a sign of reversal – an upcoming change in a thus-far prevailing trend. With options experiencing high volume and liquidity, there’s money to be made in the market – and identifying a trend reversal is one of the most surefire ways to do just that.
The spinning top candle pattern needs to be combined with other methods of analysis, of course – but it is incredibly versatile. Trend reversals can easily be taken advantage of with both long-term and short-term approaches, and even with both single-leg and multi-leg strategies. Long story short, everyone has some way to make use of it.
Let’s take a step-by-step approach and go over what these patterns represent, how to analyze them, what causes them, and finally, how to use them.
Understanding the Spinning Top Candle
Candlestick charts are an important tool for technical analysis, and spinning top candles are a dime a dozen. Knowing how to properly use this common Japanese candlestick pattern in your analysis can bring about plenty of trading opportunities that you might have otherwise missed.
A spinning top candle has a small body and long upper and lower wicks, indicating indecision in the market. The small body means that the opening and closing prices were very close, and the long wicks indicate that the highest and lowest prices of the day were far apart.
As we’ve said, all of this points to one conclusion – there is interest, and there is both buying and selling pressure, but ultimately, indecision is the end result.
That might sound extremely unappealing, but indecision can be a significant piece of information. Let’s imagine seeing a spinning top candle on a chart. Our imaginary asset is in an uptrend and has been for some time now. Suddenly, a day where buying and selling pressure were matched happens.
In most cases, this will cause the most risk-averse traders to exit their positions. This, in turn, can (and sometimes does) lead to a subsequent drop in price, or in other words, a reversal – the beginning of a downtrend.
How to Read Spinning Top Candles?
To read spinning top candles, it is important to analyze the wicks and the body. A long upper wick indicates selling pressure, while a long lower wick indicates buying pressure. The small body indicates indecision. It is important to look at the context in which the spinning top candle occurs to determine its significance.
To help bring this stuff a little closer to home, let’s use an illustration as an example, and provide a few bits of practical advice.
The full body of the candle (the space between the open and the close) is short – meaning that the first and last transactions of what is being analyzed were executed at similar prices. Our illustration uses the color red for bearish candles and green for bullish candles – although they are also commonly called black and white, respectively.
The wicks or shadows of the candle are long – indicating the lowest and highest trading prices of the timeframe being considered. These significant departures in the high and low indicate a lot of volatility, a lot of action – but no clear winner.
In general, the longer the wicks, the more likely it is that a reversal is about to occur – no matter whether it is black/red/bearish or white/green/bullish.
The second important point when reading a spinning top candle chart pattern is position. To be more precise, the position of the spinning top in relation to other candles – what comes before a spinning top and after it.
Looking at previous candles or at a longer time frame gives us an idea of the prevailing trend, as well as its strength – and looking at subsequent candles confirms or denies that a reversal is occurring.
How is a Spinning Candlestick Formed?
A spinning top candle is formed when the opening and closing prices are close to each other, resulting in the characteristic small real body of the candle in this pattern.
The long wicks indicate that the price has moved significantly up and down before settling close to the opening price. The length of the wicks is a sign of volatility in the market – both the bears and the bulls attempted to have their way, but we ended up very close to where we started.
Let’s go through some of the possible scenarios that lead to a spinning candlestick forming.
A stock in the middle of an uptrend opens at an optimistic price, and immediately begins to tumble. However, the downward push is temporary – in the middle of the trading day, bulls send the stock significantly over the opening price. By the end of the day, the enthusiasm has abated – and the stock closes very near to its opening price.
This scenario, translated into a candlestick pattern, gives you the spinning top. Likewise, a stock that opens at one price, sees a massive increase followed by a crash, but closes near to the opening price would likewise be a spinning top. So long as the market has explored both directions significantly, but the opening and closing prices are close, we have a spinning top on our hands.
Two Types of Spinning Top Candles
Like the majority of stock chart patterns, the spinning top appears in one of two, mirrored ways – as either a bullish spinning top or a bearish spinning top. Let’s take a moment to explain these subtle differences and whether or not they offer any additional insight into future price action.
Bullish Spinning Top Candle
A bullish spinning top, also called a white spinning top candle occurs when the closing price is higher than the opening price. Depending on the platform that you’re using, bullish spinning tops can be printed as green or white.
Let’s use a practical example.
This chart follows the prices of the Nifty 50 index. In the middle of a longer downtrend, a green spinning top – a bullish spinning top, is printed. After a long period of dropping prices, both the bulls and the bears are evenly matched – and this sets the stage for increasing investor confidence and an upswing.
Let’s use another example – however, this one has a small twist to it.
In the image above, both of the spinning tops we’ve circled are bullish. However, because they come after a period of rising prices, the fact that they are bullish is of little consequence – the fact that they are a signal of indecision is what matters. It should come as no surprise that a drop in price ensues.
Bearish Spinning Top Candle
A bearish spinning top, also called a black spinning top candle occurs when the opening price is higher than the closing price. Bearish spinning tops are colored either red or black, depending on your platform of choice.
Let’s turn to an example to make things easier to understand.
In the image above, you can see a spinning top chart pattern printed around the end of 2022. The chart follows the Nifty 50 Index, which consists of 50 of India’s largest companies. The candle has a small body, long wicks, and seeing as it is bearish, the opening price was higher than the closing price.
However, context is key here – looking at the previous candles, it is clear that the index was in a sustained downtrend. The appearance of a spinning top – bearish or not, indicates that uncertainty has entered the market.
Sure enough, in short order we see a reversal and a sizable increase in price – as well as the makings of a new, longer-term uptrend.
Does it Matter if a Spinning Top is Bullish or Bearish??
To keep a long story short – no. All of the data that is available suggests that, performance-wise, both bullish and bearish spinning tops behave in the same way. Even at a more abstract level, both of these variations suggest the same thing – indecision.
It makes sense when you think about it – the long wicks in the candle suggest that various prices were seen during the day – whether the closing price ended up being higher or lower than the open is irrelevant in the grand scheme of things, so long as the difference between the two isn’t major.
With both of these variations, context is king – always look at the subsequent candles and the prevailing price trend. Let’s use a hypothetical example – a stock in a long-term downtrend prints a bearish spinning top. Although it isn’t a bullish candle, it does indicate that the bears have run into a bit of trouble – and if subsequent candles confirm it, this can be the start of a reversal. The same would hold true if the candle were bullish.
What Does Spinning Top Tell Investors?
The spinning top candlestick chart pattern tells investors that while the price of an asset fluctuated quite a bit during the trading day, both the upward and downward pressures ended up canceling each other out to the greatest degree.
In summary, the market didn’t end up going either way after exploring both options. A textbook case of indecisiveness and testing the waters – but this is enough of a “clue” so to speak to build on in terms of analysis.
If you’re looking at an asset’s chart and it has been downward-bound for three months, a spinning top signaling indecisiveness can be a sign that pressure from the bears is abating, and that the bulls might start successfully driving the price up. In that case, it would be wise to abandon short positions and also put contracts that you might have previously purchased.
Real-World Example of Spinning Top Candlestick Pattern
To help you integrate this stuff a bit easier, let’s turn to some visual aid. Here’s a chart detailing some price action in Apple (NASDAQ: AAPL).
The first circled pattern is a green or bullish spinning top. However, as it occurred during a period of range trading, and there were no factors to support a breakthrough in either direction, it wasn’t a sign of anything big coming up.
However, the second circled pattern, a red or bearish spinning top, occurred at a particular juncture in the trading day. Immediately preceding it, we saw a sizable drop in price – this second spinning top was a sign of bearish indecisiveness, after which we see the bulls picking up pace and driving the price back up again.
The two patterns circled after that one are not spinning candles – note the much smaller real bodies of the candles: those are doji candles. We’ll explain the differences in a bit more depth in the next section, but it’s good to practice differentiating between the two right off the bat.
Comparing the Differences: Spinning Top vs. Doji
Spinning top candles are often confused with doji candles, another common and intuitive chart pattern. Doji candles, however, are much rarer and come in a variety of types, all of which signal different things.
As you can see in the picture, although they look similar at first glance, there are some key differences. While both have small bodies, Doji candles have almost equal opening and closing prices forming the tiny real body of the candle, as well as much shorter upper and lower shadows or wicks.
In contrast, spinning top candles have slightly different opening and closing prices which leads to a larger real body, as well as longer wicks or shadows indicating the highest and lowest prices of the day., indicating indecision in the market.
It is important to distinguish between the two to make informed trading decisions. Doji candles are much rarer than spinning tops, for one. A simple way to tell them apart is by the body – to qualify as a doji candle, the body can represent up to 5% of the candle’s range – any more and it is a spinning top.
In either case, when a spinning top or a doji appears during a trend, it is a sign of possible reversal. When it occurs during sideways trading, it is usually of little significance.
Benefits of Using Spinning Top
Now that we’re done with the explanations, the examples, and the basic framework, let’s move on to the practical side of things. There are two main benefits associated with including the spinning top chart pattern in your technical analysis repertoire.
Identify Potential Trend Reversal
Spinning top candles can help identify potential trend reversals. If a spinning top candle appears after a prolonged trend, it could suggest that the trend may be about to reverse.
The “potential” in potential trend reversal is key here – to confirm that a trend reversal is coming, make sure to take into account subsequent candles on the chart, as well as other technical indicators. Alternatively, if you’re not into the hands-on approach, learning how to trade options through alerts from a team of experienced traders can be used to automate the process.
Even if the trend reversal doesn’t pan out, this sign of indecisiveness can also serve as an early-warning system that a position should be closed – if you have existing positions, act accordingly. Alternatively, if a spinning top occurs during a period of sideways trading, it’s simply a sign of more indecision – and a hint that one should move on to greener pastures.
Accurate Risk Management
Spinning top candles can be used to manage risk more accurately. By waiting for a clear trend to emerge, investors can avoid buying or selling when the market is indecisive, reducing the risk of losses.
A spinning top doesn’t always lead to a reversal – but even those cases are significant when practicing proper risk management. Sideways action is a very common occurrence – and although that conclusion is less usable than a trend reversal, it is still usable.
In the case of sideways trading, two practical considerations arise – long-term bets should be approached extremely carefully or outright abandoned, while short-term methods such as day trading can be used to capture gains from those intraday movements.
Even if no reversal occurs, the pattern is still highly usable – either as a signal to close positions or change your strategy and approach.
Limitations of Using Spinning Top
One limitation of using spinning top candles is that they do not always provide a clear indication of future price movements. They are just one tool in a trader’s toolkit and should be used in conjunction with other technical indicators.
According to statistics curated by Tom Bulkowski, author of the “Encyclopedia of Chart Patterns”, the white spinning top and black spinning top candle patterns are rated 73rd and 69th in overall performance – and 1st and 2nd by frequency. To give you even more data so that you can put this into context, a spinning top (at least according to Bulkowski) leads to a reversal 50% of the time. Fifty percent is indecision written as a percentage.
To put that into plain English, spinning tops are seen extremely frequently – but in a large percentage of cases, it’s a case of much ado about nothing, as even when reversals do occur, there is no significant price action.
While these limitations are significant, the purpose of this chart pattern is to be a sort of alarm system. When you spot it, the idea is to corroborate what the pattern is implying by using other indicators and methods of analysis – trading volume, MACD, RSI, and support and resistance lines.
The only way to do this is by looking at subsequent candles for confirmation. While they are limited on their own, spinning top candles can lead you to plenty of opportunities that you might have otherwise missed.
The most common chart pattern of them all, the spinning top is simple in theory, difficult in practice, easy to understand, but hard to master.
But it serves a unique purpose – taking the time to master it teaches other lessons such as confirming and corroborating signals and leads, using multiple methods of analysis, as well as practicing the skill of identifying the chart patterns when looking at a screen and seeing beyond indecision.
Spining Top Candlestick: FAQs
What Does a Spinning Top Candle Indicate?
A spinning top is a candlestick pattern that indicates uncertainty. With a spinning top, while both buying and selling pressure were present to a high degree, no clear winner emerged – which often signals the possibility of an upcoming trend reversal.
Is the Spinning Top Bearish or Bullish?
A spinning top pattern can be either bullish or bearish – if the closing price is higher than the opening price, the spinning top candle is bullish. If the closing price is lower than the opening price, then the spinning top candle is bearish.
How Do You Trade a Spinning Top Candle?
To trade a spinning top candle, take into account other technical indicators such as RSI and MACD, as well as trading volume, together with subsequent candles, to determine if entering a position is likely to be profitable.
What Does a Black Spinning Top Indicate?
A black spinning top is a bearish candlestick chart pattern that indicates that the open price of a security or other financial instrument was higher than the closing price.
Does Spinning Top Guarantee Trend Reversal?
No – spinning top candles are an indicator of indecisiveness in the market. They can indicate a trend reversal, but this is far from a guarantee. This chart pattern should always be used in conjunction with other methods of analysis to confirm or deny possible reversals.
What is a White Spinning Top?
A white spinning top is a bullish candlestick chart pattern that indicates that the closing price of a security or other financial instrument was higher than the closing price.