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The Spinning Top Candlestick – Explanation.
On previous article we talked about Japanese candlestick lower and upper shadows. (check out Doji candles in technical analysis). Today i would like you to get to know another important factor for your technical analysis. And this will be the spinning top candlestick formation. We already know that candles that consist of lower long shadows and short upper shadows reflect a situation where the prices were dragged down by the sellers. They were dominating the market during the relevant time period. However, later on buyers have been able to take control and by the end of the trading session pushed prices higher for a strong closing. That behavior creates a long lower shadow for the candle. A spinning top candlestick occurs when we see both long upper and a long lower shadow and it mainly indicates an indecision of the market. Therefore, a weakening of the prevailing trend and a possible reversal. Here is how the spinning top candlestick formation looks like:
The small body of the spinning top candlestick, show us a relatively small movement between the opening and closing levels. The long shadows to both directions indicate the activity of buyers and sellers within the relevant time frame. So despite the fact that there wasn’t any significant change, the long shadows suggest an important price action within this time period. The fight between buyers and sellers results in a standoff. That, as neither of them been able to gain momentum and take control.
The interpretation of spinning tops depends on various factors related to previous market’s actions. In general, when you see a spinning top candlestick on your chart you know that it reflects a weakness of the trend. In that case you should be preferred for a potential change. If not a reversal than at least an interruption in the overall market’s sentiment. Usually spinning top candlestick appears after price’s increases and a long bullish candle. In case of a down trend they may appear after declines and a long bearish candlestick.
As i explained before, you should not use such a formation as the sole indicator for entering a position. You should always use additional factors for confirmation. Common technical tools you can use are momentum indicators and support and resistance levels. Also, remember that a reversal signal will be much stronger and precise when you use relatively high time frames. So, when you recognize a spinning top candle on a daily chart, you might have a great opportunity. If for example a red spinning top formation appears following several bearish candles, you can go long. Do it if the signal is supported by additional 1-2 indicators.
Some other candlestick patterns also consists of small bodies. I’m talking about formations such as the Hammer, shooting star and Hanging man. In case that the opening and closing prices are at the exact same level we have Doji. A certain type of spinning top candlestick is the “High Wave“. It happens when a candle consists of extremely long upper and lower shadows. It usually occurs after important economic events. It is risky to trade at such times. So stay out of the market and wait as things clam down.
In following articles i will cover some of the most important patterns that we haven’t talked about yet. So keep following. Subscribe to my site in order to be informed directly in your mailbox. And If you have any question or comment please feel free. I would be glad to get your feedback and looking forward to hear from you!