How to Trade The Spinning Top Candlestick Pattern

The spinning top candlestick pattern is a variation of the doji candlestick. But in addition to meeting the criteria for the doji candle, a spinning top features a candle body located in the center of the trading range.

Another name for this candle is the long-legged doji.

Because this candle is so symmetrical, it is easy to locate. Experienced traders can quickly find a spinning top due to the tiny body, especially during a clear trend.

While a spinning top can qualify as a doji, the body can be larger in some cases.

How to Identify the Spinning Top Candlestick Pattern

Identifying this candlestick is straightforward. There are two main criteria to look for.

• The main key is that the body is centered vertically between long upper and lower wicks.
• The body does not have to have the exact same closing and open prices, but it should be relatively close. As mentioned earlier, the body can be larger, but it should represent a small portion of the overall candle’s range.

Keep in mind, however, that this candle is one of the more common patterns, and some will be more relevant than others.

Understanding The Market Psychology Behind the Spinning Top Candle

So a candle appears with a slim or non-existent body, and features long wicks both above and below the body. It qualifies as a spinning top…but what does this tell us?

First, consider the trend at the time. Are prices steadily increasing or decreasing before the appearance of this candle? This tells us that a trend in either direction is established.

But when a spinning top appears, two things can be inferred. For one, traders are no longer in consensus about the trend at this moment in time. Buyers pushed price up, and sellers drove price right back down. Neither side could get the candle to close with strength in either direction.

Then, by creating large wicks, traders were able to explore prices momentarily, but found no conviction on either end. In other words, buyers and sellers both fought to move price substantially in their favor, and neither managed to find much success.

During a clear trend, a spinning top shows indecision. How traders act on this often depends on the market conditions. In some situations, indecision simply offers bystanders a reasonable area to enter the current trend. In others, the lack of follow through can spark a trend reversal.

We explore each of these situations below.

Increasing Reliability of the Spinning Top Candlestick

Improving the quality of the spinning top comes down to two main ideas.

First, traders can focus on the wicks, ensuring that both wicks are prominent relative to the candles around them. If the market is stuck in a narrow range, and many candles have small bodies and wicks, this candle serves as a sign that nothing has changed. There is no meaningful trade to look for in such conditions.

Second, pairing this candle with another pattern or confirmation candle will ensure that traders don’t misread the market context and take a trade against a prevailing trend. For example, if the spinning top is also a doji, the implied indecision is greater than if it has a larger body.

As shown in the second example with NQ, the market had sold off for three 15-minute candles prior to the spinning top. Waiting for confirmation in that situation allows traders to enter a reversal with more confidence.

How to Trade the Spinning Top Candlestick Pattern

In some markets, price can stay locked within a range for some time. As a result, indecision candles appear everywhere, and traders may feel confused about what to do. The easiest decision sometimes is to do nothing, and to wait for the market to provide more information.

Trading the Spinning Top as a Continuation Pattern

In the chart below of Nasdaq-100 Futures (/NQ), the market sells off during the first few hours of January 19, 2022. After a short rally, prices begin to falter again.

As sellers drive price lower, a spinning top forms. Notice the length of the wicks and the size of the body relative to the candles around it. Despite the overall trend being bearish, traders may hesitate to react to this candle until further confirmation appears.

A trader looking to short this trend can enter on the break of the low of this spinning top, assuming the candle closes bearish. Because the following candle does, our trader can enter short at 15182.5. We will not discuss exact stops here because this is a continuation trade and will thus depend on the trader’s risk parameters. Placing a stop above the spinning top’s high is adequate in this situation, but again will vary based on the strategy.

Trading the Spinning Top as a Reversal Pattern

The spinning top served as a moment for traders to enter a trade more safely in the example above. But there are times when this candle signals a reversal as well.

While traders sparked a rally overnight, during the late hours of the same trading session, a minor selloff brought prices down for about one hour. Then, a bullish spinning top closed, followed by a strong bullish candle, recovering to the exact open price of the last bearish candle, at a price of 15108.25.

If our trader had considered going short, those plans are no longer viable. This time, the spinning top has served as a sign that indecision is turning market sentiment in the opposite direction. As a result, a trader looking to go long can do so here, with a stop placed below the lows of the bullish candle that came after.

As the market climbed to above 15300, our trader faces an unrealized profit of over 190 points, with a risk of 48 points, a risk-to-reward ratio of 1:3.95.

Final Thoughts

The spinning top, or long-legged doji, is one of the more common candlestick patterns. Thus, it’s important for traders to take the time to learn it well. During periods of low activity and volume, it’s more common to find candles with small bodies. Large wicks will stand out, but traders are better off focusing on more active markets, and active trading hours.

To learn about the doji candlestick or other variations of it, see below:

• Doji
• Inverted Hammer (bullish)
• Hanging Man/Dragon Fly (bearish)
• Gravestone/Shooting Star (bearish)