Spinning Top Candlestick Navigating Downtrends A Trader’s Guide to Identifying Reversal Signals

The Spinning Top

The spinning top is an intriguing candlestick. Unlike the Marubuzo, it does not provide a trader with explicit instructions on when to enter or exit the market. Nevertheless, it is useful in giving insight into the current state of the market, which can be used by traders to position themselves accordingly.

Examine the candle closely. What can you observe regarding its form?

Two features are quite noticeable: 

– The candles have a small real body.

– The two shadows, upper and lower, are nearly identical.

What transpired during the day which led to the creation of the spinning top? At first glimpse, it may look like a plain candle with a small shape, but in reality, there were several extraordinary events that happened at some point throughout the day.

Let us keep track of what happens next.

1. Small real body- This indicates that the open and close price points of a stock are quite close. For example, if the open is 210 and close is 213, or if the open is 210 and the close is 207, this results in a small real body with only a 3 point move on a 200 Rupee stock. 

The colour of the candle doesn’t have significance – it can be either blue or red – as long as the open and close prices are nearby each other.

2. The upper shadow – The upper shadow provides an insight into the battle between bulls and bears. It connects the real body to either the high and open (red candle) or high and close (blue candle). By considering only this element, we can assume that there was an effort by the bulls to take prices higher. 

However, it wasn’t successful, as evidenced by a short candle rather than a long blue one. Consequently, it is clear that while they made an attempt to push prices up, they eventually failed.

3. The lower shadow – The lower shadow connects the real body to the market’s lowest point. In a red candle, these would be the low and close points. In a blue candle, the low and open points are connected. What can tell us if we look at the real body and ignore the upper shadow? 

It shows that while bears tried to push prices down, they were not successful. If they had been successful, then there would have been a long red candle as opposed to a short one. Therefore, while they made an effort, bearish forces weren’t able to lower prices significantly.

Consider the spinning top, with its real body, upper shadow, and lower shadow. Bulls attempted to push the market upwards, but in vain. Similarly, bears were unsuccessful in dragging it downwards. 

Neither side could exert any power, as it’s evident from the small real body. This demonstrates that indecision and doubt are prevalent – spinning tops are telling of such a situation.

A single spinning top has little significance by itself. It reveals neutrality, with neither bulls nor bears able to move the markets. Yet when seen in relation to the chart trend, it supplies a strong signal for making market decisions.

Spinning tops in a downtrend

It’s possible that a spinning top could show up in a bearish environment. If so, it may signal that the downtrend may be starting to reverse.

In a downtrend, the bears are ruling as they push prices lower. A spinning top formation could be a sign of bears consolidating their power in preparation for another selling frenzy. The bulls have also made attempts to stabilise the falling prices, but they seem to have been unable to hold their own. 

It is obvious that if they had managed to turn things around, the day wouldn’t have ended up with just a spinning top but something much better – a strong blue candle.

Considering there is a downtrend with spinning tops, what position should one take? It all depends on what we anticipate in the near future. We must accept that there are two possibilities, each with an equal likelihood:

Either there will be another round of selling.

1. Alternatively, the markets could take a turn, leading to higher prices.

2. Clearly, without any certainty of what may occur, the trader needs to be ready for either outcome, whether it be a reversal or perpetuation.

This could be a great opportunity for the trader to go long on the stock. To play safe, he ought to only invest half of what was originally intended – for example, if buying 500 shares was planned, 250 should be purchased first. By using this strategy, the trader has a chance to buy at the lowest price if the market reverses and average up by adding more if it moves upwards.

If the stock begins to decline, the trader can exit the trade and accept a loss. Fortunately, only half of their position is affected as opposed to the entire quantity.

The direction of future price movement is inconclusive. Nevertheless, something is sure – there will be a change. Therefore, one should be ready for any kind of eventuality.