Every professional trader knows that there are times when predicting future prices are easy and there are times when markets become unpredictable. But trading profitably is not about making the right predictions. It’s about having an edge. Profitable trading is possible even when there’s indecision in the markets. The Spinning Top example can be a great argument in this regard.
Spinning Top definition
Spinning Top is a commonly used candlestick pattern that signals indecision. In order to spot it, traders need to look for a short real body that has long upper and lower shadows. It shows us that traders are in indecision and buyers and sellers are levelling each other out. The pattern offers great risk to reward ratio and therefore understanding Spinning Top in trading is very important.
Why is Spinning Top important for traders?
- Understanding Spinning Top in trading can help traders find trades with good risk to reward ratios.
- Spinning Top helps traders understand market psychology better.
- Using Spinning Top traders can avoid opening market positions that will make no returns and can even cause losses because of spreads.
- Spinning Top can also be a sign of upcoming price reversal, if there have been strong uptrend or downtrend for quite some time.
- This is a common candlestick pattern, therefore most traders will be able to spot it easily.
Thorough Spinning Top explanation
Spinning Top is a common candlestick pattern that indicates indecision in the market. It consists of a small real body with long upper and lower shadows. This pattern shows itself when buyers are pushing the price up, and simultaneously sellers are selling the equivalent amount of assets, or vice versa. Which in the end causes the opening price to be around the same mark as the closing one. Spinning Top can be bullish or bearish depending on its color, however, in both cases, the candlestick represents indecision.
The pattern makes predicting the future price difficult, however, trading Spinning Top can be beneficial for some traders. The reason is simple, it offers a great risk to reward ratio. No matter where the price goes, your risk remains the same size as the size of the candle’s shadow.
Example of Spinning Top in Forex
Now let’s look at the Spinning Top example in Forex trading. Let’s say that the USD/JPY market has been moving downwards for quite some time. Following this downtrend, the market had an opening price of 137.25. Throughout the day prices started to fluctuate, but in the end, the closing price was 137.20. The fact that the price is traded around the same area shows that the market has not decided which direction to go yet. On the chart, it’s represented as the Spinning Top pattern. We can place order in any direction and the trade will be worth it if it provides us with an edge.
FAQs on Spinning Top in trading
Is Spinning Top bearish or bullish?
Neither. Spinning Top shows us that there is an indecision in the market, where buyers and sellers are levelling each other out, making the closing price of an asset the same as the opening one. Spinning Top can indicate trend reversal if there was a long uptrend or downtrend prior to Spinning Top showing itself.
How to trade with Spinning Top?
Traders that benefit from trading Spinning Tops are interested in strong moves afterwards the pattern is formed. The pattern offers small risks and high reward when it’s followed by sharp moves. There’s a 50% chance of price going in any direction. Risk is fixed and equals only to the size of the pattern’s shadow.