When scalping or swing trading the market, technical analysis and price action can help traders gauge the market sentiment, which makes it easier to forecast future price movements. A very common candlestick pattern is the spinning top candle, which hints at a potential trend reversal.
In financial markets, history tends to repeat itself because price movement is based on the psychological makeup of buyers and sellers. The buyers and sellers in the cryptocurrency market tend to exhibit the same types of behavior, rooted in human nature. This in turn makes technical analysis work — when you have enough discipline and experience. Curious about how to spot trend reversals early? Scroll on as we cover what a spinning top candle is, how it works, how it compares to other candlestick patterns and how to overcome its limitations.
What Is a Spinning Top Candle?
A spinning top candle is a small candlestick pattern that signals indecision about future price direction of a cryptocurrency. It often leads to a price reversal. The spinning top pattern has two distinguishing features:
- Short body, with the opening and closing prices close to each other,
- Long wicks (shadows) on both sides of the spinning top candle that are roughly the same length.
Since the spinning top pattern has a small body, it indicates indecision in the market: neither buyers nor sellers have the upper hand. This candlestick pattern forms within both uptrends and downtrends, and signals a possible trend reversal. On rare occasions, the spinning top candle can develop within the middle of a trend, signaling further consolidation.
In other words, if the spinning top candle develops at the end of a bearish trend, it can potentially signal the end of the current trend and the start of a new uptrend. Conversely, if the spinning top candle develops at the end of a bullish trend, it can potentially signal the end of the prevailing trend and a move in the bearish direction.
The spinning top candlestick pattern is extremely useful in predicting future price movement because it tells traders what’s happening behind the curtains. In essence, spinning top candlesticks indicate an ongoing battle between bulls and bears, as both aim to take control of a crypto asset’s price direction. Since this battle initially ends in a stalemate, the price remains almost unchanged, with no significant changes in the price direction. This can indicate either an upcoming reversal or sideways movement.
Compared to other candlestick formations and technical indicators, the spinning top candle allows crypto traders and investors to trade immediately after the pattern has formed on the price chart. If you’re trying your hand at cryptocurrency trading, it’s important to move in and out of the market fast, especially during periods of high volatility.
What Does A Spinning Top Candlestick Pattern Look Like?
What is unique about these candlestick formations is the fact that the real body is very small, but the upper and lower wicks on both sides of the candlestick body are long.
When trading spinning top candles, traders need to be aware of the fact that there are two types of spinning top candlestick patterns: a bullish spinning top candlestick, and a bearish spinning top candlestick.
The bullish spinning top candlestick pattern forms when the closing price is higher than the opening price, which results in a green candle. On the other hand, the bearish spinning top candlestick pattern forms when the closing price is lower than the opening price, which results in a red candle.
The figure below outlines the differences between the bullish and bearish spinning top.
Crypto traders should keep in mind that it’s always safer to use a candlestick pattern in conjunction with other forms of technical analysis and other trading strategies. Trading the spinning top candle in isolation, without having a complete understanding of the prevailing trend, can lead to disastrous entries and exits.
In a nutshell, crypto traders need to abide by their trading plan — and their risk management strategy — before pulling the trigger using the spinning top candle.
Spinning Top Candle vs. Doji
The spinning top candle looks very similar to the doji candle. In technical analysis, the doji candle is another candlestick pattern that signals indecision in the market, and in this regard, both candlestick patterns signal a potential price reversal of the prevailing trend.
However, some key differences set these two candlestick patterns apart from each other.
First, visually, the doji candle is shaped like a cross because it has a short body and smaller upper and lower shadows. Most of the time, the opening price is identical to the closing price. By comparison, the spinning top candle has a wider candle body and long wicks.
The spinning top and the doji candle occur quite frequently across all time frames and with all cryptocurrencies. Ultimately, both candlestick patterns depend on the confirmation from the next candle. If the spinning top candle and the doji candle are followed by a strong move in the opposite direction of the prevailing trend, then it’s safe to assume there’s a higher chance of a trend reversal.
Spinning Top Candle Examples
The spinning top candlestick patterns are straightforward to spot on the price chart. An example of the spinning top candlestick pattern is highlighted in the chart below.
On the left-hand side of the above 4-hour Bitcoin price chart, there are two instances of the spinning top candle. The price heads higher as a result, and in retrospect, one could have bought BTCUSD at those levels with a protective stop-loss just below the spinning top candle low. The fact that we have two consecutive spinning tops developing one after another adds more confirmation to the bullish case scenario.
The second spinning top candle develops at the end of an uptrend, and is followed by a big reversal in the price. The large downward candles that follow this spinning top candle confirm the upcoming reversal.
The last instance of the spinning top candle occurs after the price has been dropping. This bullish reversal signal occurs at a key support level where previous candlesticks have bounced off of. Thus, this spinning top candle ends up signaling an upward surge.
Limitations of Spinning Top Candles and How to Overcome Them
Unfortunately, spinning top candles are not the be-all and end-all. As with all candlestick patterns, there are some limitations to the spinning top candle. While the spinning top candlestick appears frequently, it also comes with drawbacks because it routinely appears during sideways movement, which leads the price nowhere.
First, the more frequently a pattern develops on the price chart, the higher the chance of getting into a bad trade, given the indecision of the price movement. In order to overcome this issue, be more selective with the spinning tops you trade. For example, crypto traders can focus only on higher time frames, such as the daily chart, which usually produce higher quality setups because they tend to discount the intraday noise.
Secondly, the spinning top candle requires more confirmation than other candlestick formations. Trade confirmation in and of itself is a positive tool to have in your trading arsenal with all candlestick patterns, not just the spinning top candle. However, there are no 100% foolproof methods that can guarantee the price will reverse, or go in the same direction as the prevailing trend.
The last limitation of the spinning top candle is that it has long upper and lower shadows, which implies that crypto traders will be forced to place wider stop-loss orders to protect themselves in case the market moves against their initial positions. This also leads to a poorer risk-to-reward ratio — because a trader or investor will have to take a larger risk for a potentially smaller reward.
One way to get around this issue is to use multiple time frame analysis. For example, if a spinning top candle prints on a daily chart, a crypto trader can zoom into the 1-hour chart — and use other trading tools as well — to better time the market. This can skew the risk-to-reward ratio in their favor.
The Bottom Line
In summary, the spinning top candlestick pattern is most profitable when it occurs at an area of value, such as key support and resistance levels, or in conjunction with other technical indicators that can help you confirm a price action. Remember that technical analysis is not meant to be used in isolation. In the long term, no one method can always yield positive returns. The main objective of technical analysis is to provide traders with a statistical edge through multiple streams of analysis. The various patterns and indicators are used as complementary tools to highlight good trading opportunities. The spinning top candlestick pattern, properly used, can hint at trend reversals, and is thus an important tool for traders to have.