Via Forexop

Last updated on August 28th, 2020

A spinning top is a Japanese candlestick pattern that denotes indecision in the market, usually at the end of a trend. It can warn of price reversal.

The spinning top is identified by a narrow, but not completely flat, candlestick body and an upper and lower shadow of nearly equal size. It is a common pattern that can be found at any timeframe.

Spinning top

The spinning top is very similar to a high wave pattern. The difference between the two is the shadow length.

If the shadow length is long, at least twice the body size, the pattern is usually classed as a high wave.

With a shorter shadow, it is classified as a spinning top. A spinning top should be nearly symmetrical, with similar sized upper and lower wicks.

Another closely related pattern is the doji. Unlike the doji, a spinning top does not have a completely flat body.

When the body is a black candlestick, the spinning top is treated as a bearish reversal, and for a white body, it is treated as a bullish reversal. However, this signal is weaker if the body is very small. These cases should be traded in the same way as doji.

The main identifiers of the spinning top are:

  • Black or white candle body
  • Narrow, but non-flat candle body
  • Upper and lower shadows of similar size
  • Appearance at swing highs and swing lows

Like the high wave, spinning tops often form in clusters in areas of consolidation. These can be local trend tops and bottoms.

Sentiment

A spinning top usually marks exhaustion after a period of upwards or downwards price action. The narrow gap between open and close price means that no headway was made during the time period of the candle.  The long upper and lower shadow indicates a great amount of volatility occurred during the period, but with neither bulls nor bears showing dominance.

Figure 2: Spinning tops in sideways range

Figure 2: Spinning tops in sideways range © forexop

Therefore, a spinning top can signal a flip from bullish to bearish or bearish to bullish sentiment. The usual cue for the direction is the candlestick body. However, most traders use other confirmations, including the trend that the pattern is forming in, as well as nearby support and resistance.

If one of the shadows touches a support or a resistance line, or even breaches it temporarily, this will add weight to the case for a reversal.

Spinning tops that appear at higher timeframes such as daily, weekly, & monthly are more significant than those which appear within intraday timeframes. Intraday timeframes are prone to noise and false signals.

Trading the spinning top

The chart below, EURUSD weekly, shows a group of spinning top patterns occurring in a shallow uptrend.

Figure 3: Spinning tops in trends

Figure 3: Spinning tops in trends © forexop

These most commonly appear at turning points during market swings. Note that the basic classification of the pattern is not entirely reliable. As shown here, bearish patterns are appearing in trend bottoms, while bullish patterns are appearing in trend tops.

This is why other confirmations are necessary. One trading technique is to treat the patterns as a short term reversal of the preceding candles. It is also useful to check if the pattern is meeting local resistance or support. This is easier if the price is trapped within a narrow range.

Figure 4: Clusters in consolidating market

Figure 4: Clusters in consolidating market © forexop

The above chart for example, shows weekly Ethereum. These patterns appear in a narrow price channel as the price consolidates.

Reliability of the spinning top

To measure the reliability of this pattern we tested it across several asset types over multi year periods.

The daily chart was measured on a twelve year period. The size of the draw-down and draw-up over the 15 bars following each spinning top signal were examined. The signal was classified as a bullish true positive if the price high watermark size was greater than the price low watermark. Otherwise it was classified as a false positive.

Bearish cases were the opposite. A bearish signal was classified as correct only when the low watermark, draw-down was greater than the high watermark, draw-up.





EUR/USD daily


True bullish positives 57.10% True bearish positives 50.18%
False bullish positives 42.90% False bearish positives 49.82%
Avg profit 0.40%

-0.07%
Total 662

570

On EUR/USD the bullish pattern appearance was more reliable with a 57% success rate, and a small average profit of 0.4%. The bearish pattern was no better than random in our tests.

GBP/USD was slightly better with success rates around 52% for both bearish and bullish signals.





GBP/USD daily


True bullish positives 52.23% True bearish positives 52.05%
False bullish positives 47.77% False bearish positives 47.95%
Avg profit 0.12%

0.09%
Total 649

609

The bearish spinning top proved to be unreliable in stock charts, where there was a strong uptrend. As the table below shows, Alphabet (GOOGLE), the bearish signal showed a failure rate of over 72%, along with an average loss of -6.5%.





Alphabet weekly


True bullish positives 67.74% True bearish positives 27.78%
False bullish positives 32.26% False bearish positives 72.22%
Avg profit 4.24%

-6.51%
Total 31

36

The opposite was true in strong downtrends. Here bullish spinning tops are better predictors of further trend falls rather than trend reversals.





Lloyds (LYG) weekly


True bullish positives 44.83% True bearish positives 58.33%
False bullish positives 55.17% False bearish positives 41.67%
Avg profit -2.18%

5.55%
Total 29

24

In cases of strong trends, it is sensible to use other confirmations such as trend and support/resistance areas.

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