How to Spot a Spinning Top

10/16/2013 6:00 am EST

Focus: TRADING

Recognizing this chart pattern can help a trader pinpoint the optimum times to enter or exit a position, says Stephen Bigalow of CandlestickForum.com.

Spinning tops are depicted with small bodies relative to the shadows. This demonstrates some indecision on the part of the bulls and the bears. They are considered neutral when trading in a sideways market. However, in a trending or oscillating market, a relatively good rule of thumb is that the next day’s trading will probably move in the direction of the opening price. The size of the shadow is not as important as the size of the body for forming a spinning top.

Candlestick patterns are clear and easy to identify demonstrating highly accurate turns in investor sentiment. Japanese candlestick patterns consist of approximately 40 reversal and continuation patterns, which all have credible probabilities of indicating correct future direction of a price move. However the 12 major candlestick patterns provide more than enough trade situations to most investors.

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There are only 12 major patterns that should be committed to memory but this does not mean that the remaining secondary patterns should not be considered. In fact, those signals are extremely effective for producing profits. Reality however demonstrates that some of them occur very rarely. In order to utilize candlestick analysis to its fullest all patterns, including the spinning top should be used and understood.

The 12 candlestick patterns illustrate the major signals. The definition of “major” means two things. First, they occur in price movements often enough so that they are beneficial to producing a supply of profitable trades. Second, they clearly indicate price reversals with strength enough to warrant placing trades. The 12 major candlestick patterns are listed below and as you can see each candle formation has a unique name. Some have Japanese names while others have English names.

12 major candlestick patterns: doji, bullish engulfing, bearish engulfing, hammer signal and hanging man, piercing pattern, dark cloud cover, bullish harami, bearish harami, morning star, evening star, kicker signals (bearish and bullish), shooting star, and inverted hammer.

Recognizing and understanding the psychology that forms the spinning top and the major candlestick patterns will provide completely new insights for investors to understand optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals but instead that they move based on the investor perception of those fundamentals.

The doji signal is one of the most predominant reversal indicators. It is very effective in all time frames whether using a one-minute, five-minute, or 15-minute chart for day trading or daily, weekly, and monthly charts for the swing trader and long-term investor.

By Stephen Bigalow of CandlestickForum.com

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