Every candlestick has a story to tell and short term traders need to be vigilant and sensitive to the signals that the market is trying to convey. Candlestick technical analysis, which was developed in Japan in the 1600s, is deeply intertwined with Japanese culture and is very popular in Japan. Of the candlestick pattern, a spinning top and doji are key signals that often indicate trend reversal. I would like to discuss on how these candlestick patterns are important reversal signals for short term traders to either take profit or trade rebounds on a downtrend. Normally, i would combine the candlestick with other indicators like moving average as support/resistance to give trading setups.
Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. This indicates a zone of tug of war between the bull and bear and neither buyers nor sellers could gain the upper hand and the result was a standoff.
Pattern on a downtrend
After a price decline, a spinning top often indicates weakness in bears and would for short term shortlist, it is time to take profit. I would look to trade very short term rebound of the downtrend following a spinning top candlestick. In the example below, i use the example of TIBCO software. On 2nd Nov, a spinning top is formed following a downtrend and the spinning top rests above the 100D EMA with stochastic in oversold region, this would give me a signal that the bears are weakening and the stock is due for a rebound. The volume would normally indicate the strength of the rebound. If the volume on a spinning top bar is high, it normally means the buyers are in already at this price. In this case, i would go long for a quick rebound trade.
Although there are many ways of using technical indicators to trade the market, candlestick patterns often produce powerful signals as price and volume are often the most simple and the strongest indicators.