A spinning top is a candlestick pattern used in technical analysis that indicates significant indecision on a trading day, and which can be a signal of a trend reversal when it occurs during an uptrend or a downtrend.
A spinning top is formed when the real body of the candlestick (the opening and closing prices) is very small and centered between much larger upper and lower shadows (the highest and lowest trading price for the day respectively).
Spinning Top Example
Suppose that the shares of company A have gone from $8 per share to $9 per share over the last week, which constitutes a strong and consistent uptrend in equity trading.
Now suppose that on the following Monday the shares open at $9.05 per share, experience volatile trading throughout the day, reaching as high as $9.25 per share and as low as $8.85 per share, before closing at $9.02 per share.
This is a classic example of a spinning top candlestick pattern. To begin, the spinning top occurs during a strong uptrend, where a sudden bought of indecisive trading is significant, unlike in the case of a security that has already been trading sideways for some time.
Next, the shares of company A have only a small gap between the opening and closing price, only $0.03 per share in this case. Finally the long upper and lower shadows of the candlestick are each around $0.20 per share, which is substantially more than the $0.03 per share of the real body.
Interpreting a Spinning Top
The spinning top chart pattern is intended to be used as a sign of indecision in the market during a significant price trend.
The long upper and lower shadows show that there was significant price action during the trading day, which signals that many market participants were opening and closing positions in the security at significantly divergent prices, while the small real body shows that despite all this price action the market decided that there was very little reason to settle anywhere far from the original opening price.
It is this contrast between the small real body showing the actual product of the day’s trading and the large shadows showing the range of different viewpoints that signals the market’s indecision.
While there are many strong opinions about the security’s price, none of them were able to push the price far from its starting point.
Therefore, it is likely that the current trend will soon stop and perhaps reverse, as the current price momentum was inadequate to overcome the strong belief that the security is undervalued or overvalued on its current trend.
Trading with a Spinning Top
The spinning top chart pattern is intended to be used as a signal for identifying an upcoming trend reversal.
Since the spinning top pattern is easy to identify on candlestick charts and generally offers little ambiguity in interpretation, it is an ideal chart pattern to use when quickly skimming through a large number of securities’ charts looking for potential trades.
Once a spinning top is correctly identified, further analysis is required before entering a position in that security. There are a wide variety of further technical analysis techniques that can be used to identify potential trades during the upcoming trend reversal that the spinning top signals.
The spinning top chart pattern is a great tool for quickly and easily identifying potential trend reversals in a security’s price.
The ease of spotting the spinning top pattern on a chart and the lack of ambiguity in interpretation make the spinning top pattern one of the best tools to use when scanning large numbers of charts looking for potential trades.
As with most technical analysis patterns, the spinning top is best used in conjunction with a variety of other technical analysis techniques.
The spinning top in particular is inadequate as a stand-alone pattern for entering trades, as it merely signals the potential for an upcoming trend reversal, but offers little information on precisely when the trend will reverse and what the actual reversal will look like.
The spinning top pattern should be among the one or two dozen chart patterns that all day traders know well, and which will ‘jump off the page’ at them when scanning charts for potential trades.