Single Candlestick Patterns (Part 2) - Zerodha Varsity

12/19/2015 Single Candlestick patterns (Part 2) Zerodha Varsity
CHAPTER 6
Single Candlestick patterns

(Part 2)
6.1 – The Spinning Top

The spinning top is a very interesting candlestick. Unlike the Marubuzo, it does not give the
trader a trading signal with specific entry or an exit point. However the spinning top gives out
useful information with regard to the current situation in the market. The trader can use this
information to position himself in the market.
A spinning top looks like the candle shown below. Take a good look at the candle. What
observations do you make with regard to the structure of the candle?
http://zerodha.com/varsity/chapter/singlecandlestickpatternspart2/ 1/20
Two things are quite prominent…
The candles have a small real body

The upper and lower shadow are almost equal
What do you think would have transpired during the day that leads to the creation of a
spinning top? On the face of it, the spinning top looks like a humble candle with a small real
body, but in reality there were a few dramatic events which took place 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 210 and the close could be 213. Or the open
could be 210 and close at 207. Both these situations lead to the creation of a small real
body because a 3 point move on a 200 Rupee 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 upper shadow connects the real body to the high point of the
day. If it is a red candle, the high and open are connected. If it is blue candle, the high
and close are connected. If you think about the real body in conjunction with the upper
shadow ignoring the lower shadow what do you think had happened? The presence of
the upper shadow tells us that the bulls did attempt to take the market higher.
However they were not really successful in their endeavor. If the bulls were truly
successful, then the real body would have been a long blue candle and not really a
short candle. Hence this can be treated as an attempt by the bulls to take the markets
higher but they were not really successful at it.
3. The lower shadow – The lower shadow connects the real body to the low point of the
day. If it is a red candle, the low and close are connected. If it is a blue candle, the low
and open are connected. If you think about the real body in conjunction with the lower
shadow ignoring the upper shadow what do you think had happened? This is pretty
much the same thing that happened with the bulls. The presence of the lower shadow
tells us that the bears did attempt to take the market lower. However they were not
really successful in their endeavor. If the bears were truly successful, then the real body
would have been long red candle and not really a short candle. Hence this can be
treated as an attempt by the bears to take the markets lower but they were not really
successful.
Now think about the spinning top as a whole along with all its components i.e real body, upper
shadow, and lower shadow. The bulls made a futile attempt to take the market higher. The
bears tried to take the markets lower and it did not work either. Neither the bulls nor the bears
were able to establish any influence on the market as this is evident with the small real body.
Thus Spinning tops are indicative of a market where indecision and uncertainty prevails.
If you look at a spinning top in isolation it does not mean much. It just conveys indecision as
both bulls and bears were not able to influence the markets. However when you see the
spinning top with respect to the trend in the chart it gives out a really powerful message based
on which you can position your stance in the markets.
6.2 – Spinning tops in a downtrend

What if the spinning tops were to occur when the stock is in a down trend?
In a down trend, the bears are in absolute control as they manage to grind the prices lower.
With the spinning top in the down trend the bears could be consolidating their position before
resuming another bout of selling. Also, the bulls have attempted to arrest the price fall and
have tried to hold on to their position, though not successfully. After all, if they were successful
the day would have resulted in a good blue candle and not really a spinning top.
So what stance would you take considering that there are spinning tops in a down trend. The
stance depends on what we expect going forward. Clearly there are two foreseeable situations
with an equal probability:
1. Either there will be another round of selling

2. Or the markets could reverse its directions and the prices could increase
Clearly, with no clarity on what is likely to happen, the trader needs to be prepared for both
the situations i.e reversal and continuation.
If the trader has been waiting for an opportunity to go long on the stock, probably this could
be his opportunity to do so. However to play safe he could test the waters with only half the
quantity. If the trader wants to buy 500 shares, he could probably enter the trade with 250
shares and could wait and watch the market. If the market reverses its direction, and the prices
indeed start going up then the trader can average up by buying again. If the prices reverse;
most likely the trader would have bought the stocks at the lowest prices.
If the stock starts to fall, the trader can exit the trade and book a loss. At least the loss is just on
half the quantity and not really on the entire quantity.
Here is a chart, which shows the downtrend followed by a set of spinning tops. The stock
rallied post the occurrence of the spinning top.
Here is another chart which shows the continuation of a down trend after the occurrence of
spinning tops.
So, think about the spinning top as “The calm before the storm”. The storm could be in the
form of a continuation or a reversal of the trend. In which way the price will eventually move is
not certain, however what is certain is the movement itself. One needs to be prepared for both
the situations.
6.2 – Spinning tops in an uptrend

A spinning top in an uptrend has similar implications as the spinning top in a down trend,
except that we look at it slightly differently. Look at the chart below, what can you see and
what would be the inference?
An obvious observation is the fact that there is an uptrend in the market, which implies the
bulls have been in absolute control over the last few trading sessions. However with the
occurrence of the recent spinning tops the situation is a bit tricky:
1. The bulls are no longer in control, if they were, spinning tops would not be form on the
charts
2. With the formation of spinning tops, the bears have made an entry to the markets.
Though not successful, but the emphasis is on the fact that the bulls gave a leeway to
bears
Having observed the above, what does it actually mean and how do you position yourself in
the market?
1. The spinning top basically conveys indecision in the market i.e neither the bulls nor the
bears are able to influence the markets.
2. Placing the above fact in the context of an uptrend we can conclude two things..
a. The bulls could be consolidating their position before initiating another leg of
up move
b. Or the bulls are fatigued and may give way to bears. Hence a correction could
be around the corner.
c. The chances of both these events taking place is equal i.e 50%
Having said that, what should you do? The chances of both events playing out are equal, how
are you going to take a stance? Well, in such a situation you should prepare for both the
outcomes!
Assume you had bought the stock before the rally started; this could be your chance to book
some profits. However, you do not book profits on the entire quantity. Assume you own 500
shares; you can use this opportunity to book profits on 50% of your holding i.e 250 shares. Two
things can happen after you do this:
1. The bears make an entry – When this happens the market starts to slide down, and as
you have booked 50% profits at a higher price, and can now choose to book profits on
the balance 50% as well. Your net selling price will anyway be higher than the current
market price.
2. The bulls make an entry – It turns out that the bulls were indeed taking a pause and the
rally continues, at least you are not completely out of the market as you still have the
balance 50% of your holdings invested in the markets
The stance you take helps you tackle both the outcomes.
Here is a chart which shows an uptrend and after the occurrence of spinning tops, the stock
rallied. By being invested 50%, you can continue to ride the rally.
To sum up, the spinning top candle shows confusion and indecision in the market with an
equal probability of reversal or continuation. Until the situation becomes clear the traders
should be cautious and they should minimize their position size.
6.3 – The Dojis

The Doji’s are very similar to the spinning tops, except that it does not
have a real body at all. This means the open and close prices are
equal. Doji’s provide crucial information about the market sentiments
and is an important candlestick pattern.
The classic definition of a doji suggests that the open price should be equal to the close price
with virtually a non existant real body. The upper and lower wicks can be of any length.
However keeping in mind the 2nd rule i.e ‘be flexible, verify and quantify’ even if there is a
wafer thin body, the candle can be considered as a doji.
Obviously the color of the candle does not matter in case of a wafer thin real body. What
matters is the fact that the open and close prices were very close to each other.
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.
Here is another chart where the doji appears after a healthy up trend after which the market
reverses its direction and corrects.
So the next time you see either a Spinning top or a Doji individually or in a cluster, remember
there is indecision is the market. The market could swing either ways and you need to build a
stance that adapts to the expected movement in the market.
Key takeaways from this chapter

1. A spinning top has a small real body. The upper and lower shadows are almost equal in
length
2. The colour of the spinning top does not matter. What matters is the fact that the open
and close prices are very close to each other
3. Spinning tops conveys indecision in the market with both bulls and bears being in
equal control
4. Spinning top at the top end of the rally indicates that either the bulls are taking a pause
before they can resume the uptrend further or the bears are preparing to break the
trend. In either case, the trader’s stance has to be cautious. If the trader’s intent is to
buy, he is better off buying only half the quantity and he should wait for the markets to
move in his direction
MODULES
5. Spinning top at the bottom end of the rally indicates that either the bears are taking a
pause before they can resume the down trend further or the bulls are preparing to
break the trend and take the markets higher. Either case, the trader’s stance has to be
cautious. If the traders intent is to buy, he is better off buying only half the quantity and
he should wait for the markets to make the move
6. Doji’s are very similar to spinning tops. Doji also convey indecision in the market. By
definition dojis do not have a real body. However in reality, even if a wafer thin body
appears it is acceptable
7. A trader’s stance based on dojis is similar to stance taken when a spinning top occurs.
(http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-1/)
(http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-3/)
47 Responses to “Single Candlestick patterns (Part 2)”
Reply (http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-2/?replytocom=167#respond)
KASHISH SHAMBHWANI
November 9, 2014 at 7:42 pm

one suggestion..why not upload a test for entire module with various set of questions having 4-5 options(cleverly
constructed questions)such as
1. theoritical question
2. questions on a particular graph etc etc
¶ (http://zerodha.com/varsity/comment/167)
Reply
KARTHIK RANGAPPA
November 10, 2014 at 2:21 am

Great suggestion Kashish. We will try and implement this sometime soon.
(http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-2/?replytocom=178#respond)
Reply
SAIKIRANGARAPATI
March 18, 2015 at 10:51 am

Hi Karthik,
Is % of Deliverable Quantity to Traded Quantity will impact any of our trading Strategies?
(http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-2/?
replytocom=10018#respond)
Reply
KARTHIK RANGAPPA
March 19, 2015 at 5:17 am

Not really.
(http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-2/?
Reply (http://zerodha.com/varsity/chapter/single-
HAWWA
candlestick-patterns-part-2/?replytocom=201#respond)
Dear sir,
What do u mean by Red candle day or Blue candle day.
If there is a gap up opening, is it Blue candle day?
And if it Gap down opening iS It a Red Candle day?.
Pls explain
KARTHIK RANGAPPA

A red candle day represents a bearish day and a blue candle represents a bullish day. There could be a Gap
opening, but the gap could be filled intra day hence Gaps as such does not decide the colour of the candle.
PEARL
candlestick-patterns-part-2/?
April 10, 2015 at 6:38 pm
What is gap up opening or gap down opening?
Reply (http://zerodha.com/varsity/chapter/single-candlestick-patterns-part-2/?
KARTHIK RANGAPPA
April 11, 2015 at 9:51 pm

The same is explained here in this chapter – http://zerodha.com/varsity/chapter/multiple-
candlestick-patterns-part-3/ (http://zerodha.com/varsity/chapter/multiple-candlestick-patterns-
part-3/)
HAWWA Reply (http://zerodha.com/varsity/chapter/single-candlestick-

patterns-part-2/?replytocom=207#respond)
Thanks for the information.
Reply (http://zerodha.com/varsity/chapter/single-candlestick-
DURGESH KUMAR
December 4, 2014 at 5:59 am
Sir, do we have any software for chart,volume study
KARTHIK RANGAPPA

Yes indeed, have written about it in this chapter (http://zerodha.com/varsity/chapter/finale-helping-get-started/).
N S RANA
does upper & lower shadow in doji need to be equal
KARTHIK RANGAPPA
Not necessary.
VAK_ARIJIT Reply
February 3, 2015 at 8:02 pm

Are these material enough for a regular trader or do I need to study more to dig deeper into the topics?
KARTHIK RANGAPPA
February 4, 2015 at 4:48 am

As far as we believe the material here is more than sufficient for you to get started and get comfortable with
trading. Of course there is no harm in learning more
SKYRACER85@GMAIL.COM Reply (http://zerodha.com/varsity/chapter/single-candlestick-

April 19, 2015 at 11:18 am
@Karthik,
Hats off for your great work.
KARTHIK RANGAPPA Reply (http://zerodha.com/varsity/chapter/single-

April 20, 2015 at 2:11 pm
Welcome!
ANOOP Reply (http://zerodha.com/varsity/chapter/single-candlestick-

May 3, 2015 at 1:37 pm
Doji tells the direction to be reverse in next session
KARTHIK RANGAPPA
May 4, 2015 at 5:57 am

Dojis and spinning tops basically convey indecision in the market. Both the bulls and bears have equal strength,
hence markets stay flat.
KALAISELVAN
May 4, 2015 at 9:03 pm

sir, is it possible to set macd like the attached one in PI. if so could you plz advice me the steps to do so this one gets
changed automatically as per the time frame and to the different stock selection (below snap taken from bazaar trend site)
KARTHIK RANGAPPA
May 5, 2015 at 5:17 am

Yes, this is possible I guess. I would suggest you email support@zerodha.com (mailto:support@zerodha.com) for
this, they will help you with it.
YASH VERMA Reply
June 4, 2015 at 5:55 am

Sir, i would like to know more about dragonfly doji and how reliable it is?
KARTHIK RANGAPPA Reply
June 5, 2015 at 5:09 am

Dragonfly Doji is somewhat similar to to a paper umbrella – you can apply the same trading logic to it.
RU0271 Reply
August 17, 2015 at 3:24 am

All examples are on shares/ stocks but no example on commodities i.e on metals or crude etc.
August 17, 2015 at 6:36 am

We will include a separate module on commodities and interest rate futures sometime soon.
PRAKASH KUMAR
September 21, 2015 at 5:14 am

heloo sir
could you please provide these all with a “virtual trading platform ” so that we can test these all before entering in real
trading market
and after getting trained and understandimg all these concepts and minimize our losses

Prakash – will try and do that. Meanwhile you could start doing paper trades.
PRAKASH KUMAR Reply (http://zerodha.com/varsity/chapter/single-candlestick-

thank you
sir
RAJIV RANJAN KUMAR
October 8, 2015 at 1:07 am
Great work sir…i learnt a lot.
KARTHIK RANGAPPA
Glad to know it helped
Reply
HARISH
October 18, 2015 at 12:16 pm

Hi Karthik,
Any stoploss suggestion for Doji/Spinning Top for bullish/bearish trend?
KARTHIK RANGAPPA
October 18, 2015 at 2:47 pm

Doji/Spinning tops are not really a trading candle, they only indicate that the market is in a state of confusion with
equal push by both bulls and bears. Hence tough to call SL levels for these patters. For every other candle use
candles high (for short trades) and low (for long trades) as stop loss.
ADITYA

can TA be used for shortterm(3-6months),medium term(6-12months) or long term (>1year)??.if yes what should be the
frequency of chart(1day,1week)?. does it also mean trading frequency will decide the trading days . i mean if we take
frequency of 1week ,i can only trade after that week?technically.
@thanks to zerodha team &kartik for great piece of knowledge. I suggest to add new successful methods & technique of TA
as an examples for better understading.
KARTHIK RANGAPPA

Yes, TA can be used for any time frame you wish. Irrespective of the time frame always look at at least 1 year data.
PRATTHAM PANT (HTTP://ZERODHA.COM)

Dear Sir, You have a talent of teaching people in a very lucid language .Kudos to you on that. You can think of educating
others as your alternative career. I am not understanding , when i look for charts, trends whatever ,it will present the charts
as of date or will it give me patterns predicting future?
Reply
KARTHIK RANGAPPA
October 31, 2015 at 2:04 pm

Thanks for the suggestion Prattham
The idea is that the past patterns help up identify patterns to trade. Back testing is the key.
PRATTHAM PANT (HTTP://ZERODHA.COM)

Suppose i am looking for candlestick chart of Axis bank or xyz.ltd on 1 nov. The chart will be as of that date
and of course the past data or it will predict the future patterns for the next week as well. If it will give for
the future as well what analysis I am going to do . I will simply believe the charts and place my trade.
Apologies for being so naive
KARTHIK RANGAPPA

Prattham – Although all the charts display historical performance, I do believe (i have only heard of
such things, not seen myself) there are few charts that give out future predictions…not sure how
reliable they are.
Reply
WILLAM
November 19, 2015 at 3:27 pm

u are a great teacher u make every thing simple. lucky now i hv started with zerodha. thanks karthik
KARTHIK RANGAPPA
Glad to have you with us
ROMI

Hi,
For GM Breweries, Hanging man formed on 1st and 2nd was a red candle day, as per the analysis done, one should have
booked the profits by shorting. but as can be seen today, that price is on a higher side. Can we assume that this pattern
doesnt work in this case or i should wait for some more time, to see if it turns out to be a red candle day?
Reply
ROMI
(http://zerodha.com/varsity/chapter/single-
the tooltip doesn’t show the data for 1st, the encircled one.
KARTHIK RANGAPPA
Thats an image, hence does not work.
Reply
KARTHIK RANGAPPA

Since the current price is higher than the pattern’s high, the hanging man stands invalid.
ROMI

thanks for the quick response Karthik.
So, if the pattern is formed on Day 1 and if the closing price of Day 2 is higher than the HIGH of Day 1(even if its a red candle
day), hanging man analysis stands void.. please confirm.
Reply
KARTHIK RANGAPPA

Yup, this is because the high of the pattern (P1) is considered the stoploss for the trade.
SHYAM
December 14, 2015 at 1:02 pm

Hello,
In order to confirm that a prior trend is DOWNWARD(or UPWARD), for how many trading sessions does the stock need to
trade BEARISH(or BULLISH)
Do you have a question or comment?

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12/19/2015 Single Candlestick patterns (Part 2) ­ Zerodha Varsity

Single Candlestick patterns

6.1 – The Spinning Top

Two things are quite prominent…

The candles have a small real body

Let us follow these events:

6.2 – Spinning tops in a downtrend

1. Either there will be another round of selling

6.2 – Spinning tops in an uptrend

6.3 – The Dojis

Key takeaways from this chapter

47 Responses to “Single Candlestick patterns (Part 2)”

November 9, 2014 at 7:42 pm

November 10, 2014 at 2:21 am

March 18, 2015 at 10:51 am

March 19, 2015 at 5:17 am

November 11, 2014 at 7:25 am

April 11, 2015 at 9:51 pm

HAWWA Reply (http://zerodha.com/varsity/chapter/single-candlestick-

December 4, 2014 at 6:02 am

February 3, 2015 at 8:02 pm

February 4, 2015 at 4:48 am

SKYRACER85@GMAIL.COM Reply (http://zerodha.com/varsity/chapter/single-candlestick-

KARTHIK RANGAPPA Reply (http://zerodha.com/varsity/chapter/single-

ANOOP Reply (http://zerodha.com/varsity/chapter/single-candlestick-

May 4, 2015 at 5:57 am

May 4, 2015 at 9:03 pm

May 5, 2015 at 5:17 am

YASH VERMA Reply

June 4, 2015 at 5:55 am

KARTHIK RANGAPPA Reply

June 5, 2015 at 5:09 am

August 17, 2015 at 3:24 am

KARTHIK RANGAPPA Reply

August 17, 2015 at 6:36 am

September 21, 2015 at 5:14 am

KARTHIK RANGAPPA Reply

September 21, 2015 at 5:30 am

PRAKASH KUMAR Reply (http://zerodha.com/varsity/chapter/single-candlestick-

October 18, 2015 at 12:16 pm

October 18, 2015 at 2:47 pm

October 28, 2015 at 9:01 am

October 29, 2015 at 8:54 am

PRATTHAM PANT (HTTP://ZERODHA.COM)

October 31, 2015 at 5:38 am

October 31, 2015 at 2:04 pm

PRATTHAM PANT (HTTP://ZERODHA.COM)

November 1, 2015 at 7:12 am

November 2, 2015 at 5:33 am

November 19, 2015 at 3:27 pm

December 3, 2015 at 5:05 am

December 3, 2015 at 5:27 am

December 3, 2015 at 5:54 am

December 4, 2015 at 7:06 am

December 14, 2015 at 1:02 pm

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12/19/2015 Single Candlestick patterns (Part 2) Zerodha Varsity