Home Technical Analysis Price action How A Price Action Trader Should Interpret The Spinning Top Candlestick Pattern

How A Price Action Trader Should Interpret The Spinning Top Candlestick Pattern

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Introduction

The candlestick pattern that we are going to study in this article is the Spinning Top. There are several ways to read the Spinning Top pattern.

Broadly speaking, three types of traders use this pattern to trade. The first type are those who trade solely based on the pattern. The second type includes the ones who combine the spinning top with an indicator and take the trade. And, the third is the group of the Price Action traders, who trade them using pure logic.

The most consistent results are obtained only by the price action traders. Therefore, this article will instruct you on how a price action trader uses the spinning top candlestick pattern.

Before getting right into the core topic, it is necessary to understand the theory about spinning top patterns. So, let us begin our discussion by explaining the meaning of a spinning top.

What is a Spinning Top candlestick?

The Spinning top is a candlestick pattern presenting a small real body with wicks on the top and bottom of almost the same size.

Figure 1 – Spinning Tops

Analysis of each part of the candle

Small real body – This indicates that the opening and closing price are very close to each other. For example, let’s consider a stock with its Open price at $300 and the Close at $302. Here, the difference between the open and close prices is just $2, which is quite a small move by the asset. Also, since the open and the close prices are very close to each other, the colour of the candle is insignificant. Be it red or green; the point that needs to be understood is that the stock hasn’t really moved much.

The upper wick – In case of a green candle, the upper wick connects the closing price and the high price. Likewise, in case of a red candle, the upper wick connects the opening price and the high price. If we find a candle with its body and only an upper wick on top, what would this signify? That the buyers tried to push the market higher but were unsuccessful in doing so. If the buyers were strong enough, they would hold the market higher, and a wick would not appear. Therefore, due to the presence of the upper wick, we can say that the buyers were weak.

The lower wick – Here, in the case of a green candle, the lower wick connects the opening price and the low price. Likewise, a red candle connects the closing price and the low price. Ignoring the existence of the upper wick, how would we read the candle? Now, the candle has only a body and its lower wick. It denotes that the sellers tried to go lower but were not successful in their endeavour. Therefore, we can conclude that the sellers are quite weak because they could not hold when the market came lower.

The combination of all three of these components make up the spinning top candlestick. Putting all three elements in one candle, we can say that both buyers and sellers are strong or both are weak. Thus, the spinning top candles typically represent indecision and uncertainty in the market.

Now, in the next topic, we shall see the two different perspectives of how a Pattern Trader looks at the candlestick and how a Price Action Trader analyzes it.

Non-Price Action traders’ perspective

Generally, people trade this pattern in different ways. Let us understand one of the strategies they use.

Consider the example chart below. Reading the market from left, we can clearly see that the market is in a downtrend making lower lows and lower highs. But, the market then comes to a consolidation phase where the spinning top candles start to appear (the encircled region).

 Two interpretations can be made:

  1. Since the market is in a downtrend, indicating that the sellers are powerful at the moment. The spinning candles represent that the market is preparing to go for another round of selling.
  2. The occurrence of the spinning top also indicates that the buyers have made an entry, and could reverse the market at this point.

If the trader has been looking to go long, this could perhaps be the best time to enter the market. However, as the market is still in a downtrend, it is recommended to enter the market by reducing their position size by 50%. And, if the market starts to go in their direction, they can add & average up the rest of their positions by buying again.

If the price starts to move down, the trader can exit the trade. This would result in a loss of course, but, since the position size was small, the loss would be insignificant.

Below is another chart opposing the above example

Price Action traders’ perspective

We saw that non-price action traders are not entirely certain about the next move of the market, which is the reason they put only half of their money into it. While the price action traders, on the other hand, use this pattern as a tool to time the market. For them, it is an indication that the market is going to blast soon. So, once the spinning top appears, they gear up to take the trade. Also, the price action traders trade this pattern only when the market is in a trending state. An example of the same is given as follows.

We first determine the overall trend of the market. Here, in the  example chart below, it is clear that the market is in an uptrend. The marigold colour line represents the Support & Resistance line. Now, we wait for a pullback to anticipate a buy on this. We can see that the price starts to pullback, and once the price reaches the S&R line, the spinning top candlesticks start to appear as well. This is an indication that the pullback sellers are fading away, and the buyers are beginning to show their presence. Now, we have a better understanding of what the market is trying to indicate by the spinning top candles. This is when we can trigger for the buys. A stop-loss below the spinning top candlesticks area and a target around the recent highs shall be good enough.

Note: A price action trader takes the spinning top candlesticks into account only when they appear in a logical area (for example – support & resistance).

Conclusion

There are several ways to interpret the spinning top candlesticks. Traders who are already in the trade, use them to add or close positions; some use it as a tool to enter a trade; while some of them completely avoid it. Since we are talking about the price action traders, they use this pattern as one of the tools to enter a trade; given that, all other criteria are entirely satisfied. So, metaphorically, we can say that this pattern is “the calm before the storm”.

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