How to Day Trade for a Living: Tools, Tactics, Money Management, Discipline and Trading Psychology

I now want to review the two most important indecision candlesticks for day trading (spinning tops and Dojis).

Spinning tops, as seen in Figures 6.6 and 6.7 below, are candles that have similarly-sized high wicks and low wicks that are usually larger than the body and will often be a little bit more indecisive. Let’s call them indecision candles . In these candlesticks, the powers of the buyers and the sellers are almost equal. Although no one is in control of the price, the fight continues on. Usually, the volume is lower in these candlesticks as traders are waiting to see who wins the fight between the sellers and the buyers. Trends in price can change immediately after indecision candles and they therefore are important to recognize in the price action.

Figure 6.6 - Buying and selling pressure definition on spinning top candlestick.

Dojis are another important candlestick pattern and come in different shapes and forms but are all characterized by having either no body or a very small body. A Doji is also an indecision candlestick that is similar to a spinning top. When you see a Doji on your chart, it means there is a strong fight occurring between the bears and the bulls. Nobody has won the fight yet.

In Figure 6.8 above, a Doji tells us the same story as a spinning top does. In fact, most types of indecision (reversal) candles tell you basically the same thing. This will be discussed in greater detail in the next section.

At times, Dojis will have unequal top and bottom wicks. If the top wick is longer, it means that the buyers tried unsuccessfully to push the price higher. These types of Dojis, such as the shooting star, are still indecision candlesticks, but they may indicate that the buyers are losing power and that the sellers may take over .

If the bottom wick is longer, as in hammer Dojis, it means that the sellers were unsuccessful in trying to push the price lower. This may indicate an impending takeover of price action by the bulls.

All Dojis indicate indecision and possible reversals if they form in a trend. If a Doji forms in a bullish trend, it suggests that the bulls have become exhausted and the bears are fighting back to take control of the price. Similarly, if a Doji forms in a bearish downward trend, it suggests that the bears have become exhausted and the bulls (buyers) are fighting back to take control of the price. You will see examples of these in Figures 6.9 and 6.10.

After learning to recognize these candlesticks, it is important that you not get too excited too quickly. Candles are not perfect. If you take a trade every time you see a Doji formed in a trend, you will end up with significant losses. Always remember that these candles only indicate indecision and not a definite reversal. To use indecision candles effectively, you must look for confirmation candles and ideally use them with other forms of analysis such as support or resistance levels, both of which are explained in the next chapter.