Last Updated on 21 September, 2020 by Samuelsson
A spinning top is a one-candle reversal pattern that signals uncertainty in the market, and is preceded by either an uptrend or downtrend. As to its appearance, a spinning top has a small body that closes in the middle of the candle’s range, with long wicks to both sides.
In this article, we’re going to take a closer look at the spinning top candlestick pattern. We will cover its meaning, definition and ways you can improve the pattern. In addition to that, we’ll also share a couple of example trading strategies.
Spinning Top Definition
Here are the conditions for a spinning top:
- The body is contained within the middle third of the range
- The candle can be either bullish or bearish
A spinning top is traditionally seen as a form of reversal pattern that occurs after a bullish or bearish trend.
However, according to some, the pattern shouldn’t be interpreted as a reversal pattern, but more like a general sign of indecision in the market.
What Does a Spinning Top Tell Us About the Market?
Since candlestick patterns are representations of market action, they give us interesting insights into what the market has been up to.
Trying to analyze or understand why and how a market formed a pattern is a great exercise that certainly could help to improve your understanding of the markets over time. Soon you will start to notice recurrent patterns, that may eventually lay the groundwork for a trading strategy!
Having all this said, let’s see what might have happened as the market performed a spinning top!
The story of the Spinning Top Pattern
Since a spinning top can form both in an uptrend and downtrend, we’ll just exemplify with one that appears in a downtrend.
As the market is trending down, the market sentiment is bearish, and most people anticipate that it will continue to go down for some more time. However, since the market has gone down for an extended period of time, buying pressure starts to increase, in the hope that a market reversal is imminent.
During the coming bar, it becomes apparent that buyers and sellers are equally strong. Both sides manage to take the lead for some limited time, which creates the wicks on both sides of the body. And the fact that it closes near the open, signals that neither buyers nor sellers had an advantage.
So, in this case, a spinning top signals that an extended period where selling pressure prevailed might be coming to an end.
Spinning Top Examples
Here follow a couple of examples of the spinning top pattern:
Spinning Top vs Doji
If you have read about the Doji pattern, you might be a little confused by now, since it closely resembles a spinning top.
And we agree with you. The two patterns are nearly identical, with very small differences that in fact are negligible. As such, you may consider both the same pattern.
How to Improve a Spinning Top
While the spinning top on its own is believed to signal a reversal of the trend, it’s not enough to act on alone. You need additional filters and conditions to ensure that the odds are in your favor.
Now, there is an infinite number of filters and conditions you could try, but in this section, we wanted to share some techniques that we use a lot for our own trading strategies. Just remember that what works depends heavily on the timeframe and market. As such, we can’t give you a definitive answer to what works best. That is something you will have to figure out yourself, preferably through backtesting. (We cover this in more depth in our guide to backtesting)
Having said all this, let’s start!
Volume is a great addition to the price chart, since it shows you how much activity there was behind a price move. This is information that you would have missed by only using the historical prices of a market. As such, it’s fair to say that volume adds a second dimension to your trading!
In our experience, the significance of a pattern can be greatly impacted by volume. Some patterns will work great when there is low volume, while others will only work in extremely high volume conditions.
These are some of the volume filters we use the most:
- Volume is greater or lower than the volume of the previous bar.
- Volume is higher or lower than the moving average of volume
- Volume is at it’s x-bar high or low
With price patterns like the spinning top, it’s often believed that high volume levels could be signs of so-called “volume blowoffs”. In short, it means that a market depletes its last resources in a final attempt to go further in the direction of the trend. This might speak for that a spinning top with high volume would work better. However, in our own research, we’ve seen that patterns like these could work better with low volume as well!
Again, what works best will depend a lot on your market and timeframe, so you will have to carry out some tests to see for yourself!
Seasonal or Time Based Tendencies
Most markets have some type of seasonal or time-based tendencies, meaning that they aren’t equally bullish or bearish all the time. For example, there might be certain days, months, hours or weeks, that time after time show bearish or bullish tendencies.
For example, in quite a lot of our strategies we use the day of the week to ensure that we don’t take trades on those days where the strategy hasn’t worked well historically.
Now, there might be that single trading strategies work better or worse on certain days, but you could also look at the general tendency of the market itself. For example, if you know that a market tends to become more bullish in the second part of the month, you might want to go long on a spinning top that appears after a downtrend around the 15th, but shy away from one that follows an uptrend.
When we look for tendencies like these, we usually consider:
- The day of the week
- The hour of the day
- The part of the month. We usually split it into two or three halves.
Overbought or Oversold Conditions
Now, another great way to see whether a spinning top is worth taking or not, is by using some sort of filter that measures overbought and oversold conditions. Generally, when securities like stocks have gone too far in one direction, they tend to revert back. Following this, we might only want to take a trade if the market is overbought or oversold, depending on if you’re going short or long.
So, to make it clear, you want to go long when the market is oversold, and short once it’s overbought.
One of our favorite indicators to define overbought and oversold conditions is the RSI indicator. The traditional interpretation is that readings above 70 signal an overbought market, and readings below 30 an oversold market.
Another simple yet effective filter could be to demand that the close is the highest close five bars back for an overbought market, and the lowest close 5 bars back for an oversold market.
Spinning Top Trading Strategies
Now that we have covered how you could improve the accuracy of a spinning top, we wanted to show you a couple of trading strategies.
The strategies below are not meant for live trading, but are provided as inspiration. If we were to build a trading strategy with the spinning top, this certainly is how we would start!
Strategy Example 1: Going Long on a Spinning Top With Confirmation
As a spinning top only tells us that the market is hesitant about where to head next, there is a quite big chance that it will continue in the dominant trend direction shortly thereafter. That’s why we might want to have some sort of confirmation in the form of price action, before we enter the market.
One common way to define a confirmation, is that the market closes above the high of the spinning top formation. So that’s what we’re going to use in this strategy!
We go long if:
- We’ve had a spinning top
- The market closes above the high of the spinning top. (Confirmation)
Then we exit the trade after 5 bars.
Trading Strategy 2: Spinning Top With High Volatility
The volatility of the market could have a great impact on price patterns and their accuracy. Sometimes a pattern will only work in a highly volatile market, while the opposite sometimes holds true as well.
I this strategy example we require that the volatility level in the market has increased before we take a trend. With mean reverting markets, a fiercer move often results in a stronger and more rapid trend reversal, which is something we want to take advantage of!
We’ll use ADX to measure the trend strength, and require that it shows a reading of 20 or more, AND that the current reading is higher than that five bars ago.
So, the rule become that we go long if:
- We have a spinning top
- ADX is higher than 20, and stands higher at the close of this bar than it did 5 bars ago.
Then we once again exit the trade after 5 bars.
In this guide, you’ve learned not only how to identify a spinning top pattern, but also how you could go about to improve the accuracy of the pattern for real trading.
However, before we end, we just wanted to share a piece of advice with you:
NEVER TRADE SOMETHING YOU HAVEN’T VERIFIED. The world of trading is littered with fake gurus and poisonous advice. As such, you need to test the strategies and patterns you want to use, before trading real money.
If you’re interested in learning more about this, we recommend that you read any of the guides below: