Single Candlestick Patterns (Part 2)
The Spinning Top
The spinning top is a very interesting candlestick. Unlike the Marubuzo, it doesn't give the trader a signal to enter or leave the market at a specific point. But the spinning top tells you useful things about what's going on in the market right now. With this information, the trader can decide where he wants to be in the market.
A top that spins looks like the candle in the picture below. Look closely at the candle. What do you notice about the candle?
Two things are quite prominent…
- The candles have a small body
- The upper and lower shadow are almost equal
What do you think must have happened during the day for a spinning top to be made? On the surface, the spinning top looks like a simple candle with a small body. However, a few interesting things happened during the day.
Let us follow these events:
1. Small real body – This indicates that the open price and close price are quite close to each other. For instance the open could be 110 and the close could be 113. This leads to the creation of a small real body because a 3 point move on a BDT 100 stock is not much. Because the open and close price points are nearby to one another, the color of the candle does not really matter. It could be a blue or a red candle, what really matters is the fact that the open prices and close prices are near to one another.\
2. The upper shadow – The real body is connected to the highest point of the day by the upper shadow. If the candle is red, the high and the open are linked. If the candle is blue, the high and the close are linked.
The upper shadow shows that the bulls did try to bring the market up. But they didn't really achieve what they set out to do. If the bulls had really done well, the real body would be a long blue candle, not a short one. So, this can be seen as an attempt by the bulls to push the markets up, but they didn't really succeed.
3. The lower shadow – The real body is linked to the low point of the day by the lower shadow. If the candle is red, the low and the close are connected. If the candle is blue, the low and the open are linked.
The fact that there is a lower shadow shows that the bears did try to push the market down. But they didn't really achieve what they set out to do. If the bears had really won, the real body would have been a long red candle, not a short one. So, this can be seen as a try by the bears to push the markets down, but they didn't really succeed.
Now look at the spinning top as a whole, with all of its parts. The bulls tried in vain to get the market to go up. The bears tried to push the markets down, but that also didn't work. The small real body shows that neither the bulls nor the bears were able to make a difference on the market. So, spinning tops are a sign of a market where there is a lot of indecision and uncertainty.
If you just look at a spinning top, it doesn't tell you much. It just shows that neither the bulls nor the bears were able to move the markets. But when you look at the spinning top in relation to the trend on the chart, it sends a very strong message that can help you decide how to act in the markets.
The Dojis
The Doji looks a lot like the spinning tops, but it doesn't have a body at all. This means that the prices at the start and end are the same. Dojis are an important candlestick pattern that tell us a lot about how people feel about the market.
The traditional definition of a doji says that the open price should be the same as the close price, and the real body should be almost nonexistent. The length of the top and bottom wicks can be anything.
But if you remember the second rule, which says to "be flexible, check, and quantify," the candle can still be considered a doji even if it has a very thin body.
The Dojis have similar implications as the spinning top. Whatever we learnt for spinning tops applies to Dojis as well. In fact more often than not, the dojis and spinning tops appear in a cluster indicating indecision in the market. Have a look at the chart below, where the dojis appear in a downtrend indicating indecision in the market before the next big move.
