Introduction 

All the candlestick patterns are based upon the assumption that history tends to repeat itself. This is one of the most critical assumptions in technical analysis.

Traders use candlestick patterns to set up a trade. The patterns are identified by grouping two or more candles in a sequence. 

Sometimes trade signals can be identified with the help of a single candlestick pattern.

One such single candlestick pattern is a spinning top. Let’s learn more about this pattern in detail.

What is Spinning Top?

It is a single candlestick pattern that represents indecision between buyers and sellers.

Unlike Marubozu, it does not give any trading signal along with entry and exit points. This pattern does not convey anything when looked at in isolation.

However, when looked at on a price chart, it gives useful information that traders can use to position themselves in the market.

How to identify the “Spinning Top” pattern?

A spinning top pattern has a very small body with upper and lower wicks of almost equal length.

A small body indicates that the opening and closing prices are same or very close. For example, a stock’s opening price is 100 and the closing price is 101.

The upper wick or shadow tells us that the bulls tried to take the price higher but failed to sustain that throughout the day.

The lower shadow or wick tells us that the bears tried to take the price lower but they too failed to sustain that throughout the day.

 Now if you look at the spinning top as a whole, the message conveyed is that neither bulls nor bears were able to influence the market. 

Trading Strategy for “Spinning Top” pattern

Whenever a spinning top pattern is formed there are two situations that can play out.

When the pattern is formed in an uptrend :

1. The buyers could be consolidating before going long on the stock and there could be a continuation in the uptrend.

2. There could be a bearish trend reversal and prices may fall drastically.

When the pattern is formed in a downtrend:

1. The sellers may be consolidating and there might be another round of sell-off in the stock, thus, continuing the downtrend.

2. There could be a bullish trend reversal and prices may rise sharply.

There is no certainty in which direction the prices will move. In such a situation the trader needs to be prepared for both situations.

Ideally, a trader should place a trade with only 50% of his capital in such a situation. 

If there is an uptrend after the spinning top pattern, the trader can increase his stake by another 50% or book his profits.

If there is a downtrend after the spinning top pattern, the trader can sell his stake and limit his losses by half as he has invested only 50% of his capital.

This strategy helps a trader in tackling both outcomes.

Conclusion 

The spinning top pattern is a sign of confusion between buyers and sellers. Unlike other candlestick patterns, it does not give a buy or sell signal. Rather, it makes the trader cautious about his position in the market.

Since the market could move in either direction, a trader should either minimize his position size or wait for the confirmation candles to form.

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