The Spinning Top candlestick is an enchanting puzzle for traders searching for crucial market insights!
Its ability to discover market indecision and pauses in price movements makes it a very invaluable tool in your trading arsenal.
On this ultimate guide, I’ll delve into the nitty-gritty of the Spinning Top candlestick…
Uncovering all of its secrets…
And also you’ll learn every part from the way it is formed to how you may actually trade it!
Are you ready?
So here’s what you’ll learn:
- Spinning Top candlestick explained for beginners.
- The hidden meaning of the Spinning Top candlestick that no person tells you.
- 2 common mistakes you need to avoid in any respect costs.
- Trading strategies to trade the Spinning Top candlestick effectively.
Let’s begin!
What’s the Spinning Top candlestick?
Well, the Spinning Top candlestick is essentially a small-to-medium range candle marked by a small body and comparatively longer wicks…
It might let you know when there may be a pause or indecision happening out there.
Here’s what it looks like…
Because the body is so small, it doesn’t actually matter what the colour of the body is.
As I said, the Spinning Top candlestick is an indecision candle…
But have you ever ever heard of bullish indecision or bearish indecision?
That simply doesn’t make sense, right?
The thing is…
The Spinning Top candlestick is a pattern, that must be viewed within the context of the general market conditions.
When you can learn to discover the underlying market context by which the Spinning Top candlestick is appearing, it might work wonders for you!
But don’t worry, we are going to get to that part soon…
First, I need to share somewhat bit more in regards to the Spinning Top candlestick, to assist further solidify your understanding of this super pattern. Read on!
What does the Spinning Top candlestick signify?
As mentioned, the Spinning Top candlestick tells you that there’s a pause or indecision out there.
Let’s dig somewhat deeper now!
Take a look at one in every of the elemental structures of any traded market…
You already know that a market will cycle between periods of low volatility and high volatility.
A period of low volatility will probably be followed by a period of high volatility and vice versa.
A period of high volatility is when the market makes big moves…
Whereas a period of low volatility is when the market just pauses without making any meaningful moves.
Have a have a look at the chart below to see what I mean…
EUR/USD Day by day Chart:
I would love to emphasise a number of things within the chart above, too:
- Notice the cyclical nature of volatility: High volatility is followed by low volatility which is again followed by high volatility.
- The high volatility period was marked by long-range candles with wide bodies.
- The low volatility period was characterised by small-range candles with little-to-no bodies, which as we’ve seen are the characteristics of a Spinning Top candlestick.
Now for those who connect the dots…
You’ll realize that the Spinning Top candlestick tells us that the market is in low volatility mode!
This suggests that a period of high volatility is more likely to follow, and that is precisely what you and I would like, as traders, right?
In spite of everything, how will you earn money if the value just sits there doing nothing?
Ideally, you would like a market that may make an enormous move.
And for those who can appropriately understand the context inside which this low volatility period is appearing, you may put yourself able to benefit from the increased volatility that follows.
This is precisely the premise upon which the strategies that I share in this text are based on!
But before we get to the strategies, let me quickly let you know the two mistakes that you need to avoid while trading the Spinning Top candlestick…
Avoid these mistakes while trading the Spinning Top candlestick…
Mistake #1: Using it as a trend reversal signal shouldn’t be a superb idea…
Now, conventionally, it is claimed that the Spinning Top candlestick pattern is a trend reversal pattern…
But I urge to differ!
I argue that it takes greater than a single candle to reverse an entire trend.
Most of the time, after forming the Spinning Top candlestick, the value will pause for some time or have a small response, only to make a trending move again.
To point out you what I mean, let me provide you with a number of examples…
EUR/USD 4-Hour Chart:
Here, in a prevailing downtrend, the value formed several Spinning Top candlesticks but did not reverse.
As an alternative, it continued lower.
Also, note that there are several more Spinning Tops on this chart, but I’ve marked only the proper ones to further emphasize my point.
Take a have a look at one other…
NVIDIA Day by day Chart:
On this chart, after the Spinning Top candlesticks were formed, the value paused for a bit before continuing higher.
Are you able to see why it shouldn’t be a superb idea to bet against the trend just based on a single candle?
This leads me to the second mistake to avoid…
Mistake #2: Don’t use the Spinning top candlestick as a standalone pattern…
The Spinning Top pattern shouldn’t be a technique in itself!
Let me explain…
When you check any chart, you will note that the Spinning Top candlestick could be very common.
It appears so incessantly that if you would like to actually use it, you have to find a way to know the context inside which it’s appearing.
Have a have a look at the chart below…
Walmart Day by day Chart:
Do you see how some Spinning top candlesticks led to a price rise, while some led to falls and in some cases, the value just went sideways?
So, what number of are you going to trade?
Also, it’s secure to assume that almost all traders are tracking a couple of stock/pair.
Are you able to imagine the variety of Spinning Top candlesticks that may show up daily?
Clearly, it’s going to be so much!
This is the reason it shouldn’t be a superb idea to make use of the Spinning Top candlestick as a trading signal by itself.
Now…
Allow us to have a look at how try to be trading this awesome pattern…
Tips on how to appropriately trade the Spinning Top candlestick pattern
Strategy #1: The flag strategy
On this strategy, we are going to incorporate the Spinning Top candlestick, into the classical flag pattern.
When you don’t know, here’s what a flag pattern looks like…
Let’s break this pattern down:
- A trending move, also often known as the pole of the flag.
- A pause, which looks like a flag, hence the name. Here, the volatility contracts.
- That is the continuation period. Volatility increases again and price makes a trending move.
But, where does the Spinning Top fit into this?
As I said earlier, a Spinning Top candlestick tells us that the volatility is low…
So, where within the flag does the value have low volatility?
That’s right! Within the flag region where price pauses!
Low volatility is significant, as the value must digest its previous trending move before it might trend again without becoming exhausted.
Essentially, what we’re on the lookout for is for the value to make a trending move…
…take a pause…
…before forming a number of Spinning Top candlesticks!
This tells us that the volatility is low, and volatility is more likely to expand from here.
And because the price is trending, a continuation within the direction of the trend becomes more likely.
Now, have a have a look at this general diagram I’ve made as an instance what we’re on the lookout for on the charts…
Before I show you some examples, though, take a have a look at the principles of this strategy:
The context:
Search for a trending move that’s followed by a pause. The looks of Spinning Top candlesticks tells us that volatility is low and the value is digesting its previous trending move.
Entry criteria:
For bull flags: Enter when there may be a robust breakout candle that closes above the bull flag.
For bear flags: Enter when there may be a robust breakdown candle that closes below the bear flag.
Stoploss:
For bull flags: Below the flag low.
For bear flags: Above the flag high.
Taking Profits:
You’ll be able to either book profits at a hard and fast reward: risk ratio like a 1:1, 1.5:1, or 2:1.
Alternatively, if you would like to ride the trend, you should use the 20 SMA to ride the trend.
An exit signal could be generated if you get a detailed below (for bull flags) or above (for bear flags) the 20 SMA.
So, principally, a mixture of the above two techniques where partial profits are booked at a certain RR ratio and a certain portion is kept to ride the trend is a superb idea!
Also, take into account that profit-taking is a dynamic exercise and in addition depends upon whether there may be one other trade by which your funds might be higher utilized.
OK, let’s look a bit closer at some examples now…
Goldman Sachs Group Day by day Chart:
In this instance, the value first had an excellent move higher, forming the pole of the flag.
This was followed by a pause where the formation of Spinning Top candlesticks indicated low volatility.
So, we’d start watching the stock at this point!
Entry was triggered when the value broke out of the flag and more importantly, closed above it.
The entry might have been taken just before the close, or at the subsequent day’s opening.
Stop loss could be below the low of the flag as marked.
Price had a pleasant move higher. Profits could’ve been booked as per the techniques discussed above.
Now let’s have a look at a bear flag example next…
Sea Day by day Chart:
On this chart, the value had a move down forming the pole of the flag.
It went right into a consolidation forming several Spinning Top candlesticks inside the flag.
Entry was triggered when the value had a breakdown and closed below the flag.
Stoploss could be above the high of the flag as marked and this was followed by a superb move lower.
So, that was the flag strategy!
I hope the examples helped you understand the strategy higher.
If you might have any questions, please don’t hesitate to ask them within the comments!
Now, there may be one other interesting way by which we will use the Spinning Top candlesticks.
Presenting to you the subsequent strategy…
Strategy #2: The false break strategy
A false break simply means a failed breakout or breakdown.
On this strategy as well, we’re things inside the context of the prevailing trend and can take trades only within the direction of the trend.
But you might be wondering…
What the Spinning Top candlestick has to do with this, right?
Well, when a Spinning Top candlestick forms when the value is attempting to breakout/breakdown, it tells us that there remains to be indecision and the break in price lacks conviction.
For long trades…
We are going to look to purchase a failed breakdown at a vital swing low or support zone, inside the context of an overall uptrend.
When a breakdown fails, all those that shorted on the breakdown will see their stops getting hit and begin covering their shorts, which further adds to the upward momentum.
Entry trigger: A bullish candle, which tells us that the breakdown has likely failed.
Stoploss: Below the low of the failed breakdown.
Taking profits: The techniques are similar to those discussed in strategy #1.
Here’s an example…
Apple Day by day Chart:
On this chart, we see a prevailing uptrend.
The value attempts to breakdown below the swing low, but forms a Spinning Top candlestick as a substitute.
This tells us that the break in price lacks conviction.
A bullish bar adds confluence to this false break and serves as our entry trigger.
Our stop loss could be below the low as marked.
We see a pleasant move higher!
Now allow us to have a look at the short side of things, we could?
For brief trades,
We are going to look to short a failed breakout at a vital swing high or resistance level, inside the context of an overall downtrend.
When the breakout fails, the stops of all those that went long will probably be hit, and it’ll further add to the selling pressure.
Entry trigger: A bearish candle, which tells us that the breakout has likely failed.
Stoploss: Above the high of the failed breakout.
Taking profits: The techniques are similar to those discussed in strategy #1.
Have a have a look at this instance…
GBP/USD Day by day Chart:
Here, the value attempted to breakout above the previous swing high, but failed and reversed intraday, which served as an entry trigger.
The presence of a Spinning Top candlestick just before this failed breakout told you that there was indecision going into the breakout.
This was followed by a pleasant move lower.
So…
That was all in regards to the Spinning Top candlestick.
By now, I hope you realize how powerful the Spinning Top candlestick might be whether it is utilized in the precise context.
Let’s do a fast recap of all that we’ve learned!
Conclusion
In this text, you learned:
- Tips on how to discover the Spinning Top candlestick.
- Its significance and underlying structure.
- The importance of using the Spinning Top candlestick in the precise context.
- The mistakes that you have to avoid while using the Spinning Top candlestick.
- 2 strategies to effectively trade the Spinning Top candlestick.
Hope you enjoyed and gained lots of value from this post!
Now, a fast query for you,
What was your most vital takeaway from this post?
I’m wanting to know!
Cheers!
Disclaimer: The contents of this text are for educational purposes only. They will not be to be constituted as financial advice.