How to Trade the Tweezer Bottom and Top Candlestick Patterns

Tweezer top and bottom, also known as tweezers, are reversal candlestick patterns that signal a potential change in the price direction. Both formations consist of two candles that occur at the end of a trend, which is in its dying stages.
 

Structures

The tweezer top candlestick pattern is of the same structure as the tweezer bottom, except for the fact that it happens at the end of an uptrend, and therefore, it is a bearish reversal pattern. The first candle is bullish, and it continues in the same direction, while the second bearish candle indicates that the trend may be changing soon. 

Both the bottom and top tweezers are only valid when they occur during uptrends and downtrends. Their appearance during choppy trading conditions is practically meaningless, and it signals the market indecision to move in either direction.

Significance

How to trade the Tweezer Bottom Candlestick Pattern

As noted earlier, the bullish tweezer occurs at the bottom of a downtrend. The EUR/USD price action on the daily chart had been moving lower for a longer period of time, as a series of the lower highs and lower lows was recorded.

If you look at the bullish tweezer at the bottom, the first candle is a strong powerful bearish candle that signals the continuation of the downside move. However, the second candle prints a new short-term low before surging higher to erase almost all losses that occurred in the prior session.

Going forward, the bulls are able to build on the gains made during the second candle’s timeframe and ultimately push the price action higher, completely reversing the trend. 

In this particular case, we see a very strong bullish candle that further adds to the overall bullishness of the tweezer bottom candlestick pattern. This is, among other things, the reason the reversal was extremely powerful.

Trading the bullish tweezer is not much different from trading other bullish reversal candlestick patterns. For the entry, you should wait for the formation to be completed before entering a trade.

The stop-loss is always placed below the latest low, as the new low would invalidate the pattern. Profit-taking orders should be calculated based on other technical indicators, always looking to secure at least double the amount of pips that we are initially risking.

Unlike the bullish tweezer, the tweezer top candlestick formation occurs at the top of an uptrend, therefore it is a bearish pattern. In the example below, we again have a EUR/USD daily chart, but this time the initial trend is bullish. 

As you can see, it is an extremely powerful bullish trend of around 800 pips in range. At the top, the price action gaps higher and continues in the same direction. Albeit the strong powerful trend, the next candle is extremely bearish as its body is almost double the body of the prior candle.

Hence, not only were the prior candle’s gains erased, but the gap was filled in as well. Similar to the first example, this type of a bearish tweezer is extremely strong due to the shape of the second candle, and the chances of a reversal are very high. 

Our entry is where the second candle closed the day. The problem here could be the size of the second candle, given that it is 200 pips away from the top and our stop-loss. For us to be profitable, profit-taking levels should be nearly double.

Thus, we use different types of analysis to see where the reversal may end. Given the strength of the bull run, it is likely that the reversal will be powerful as well. Finally, we take the start of the bull trend as a reference for take profit. In the end, the bears are successful in erasing all prior bulls’ gains and even breaching the support.

This is a more long-term trade as the ranges are big. We risked around 200 pips but have managed to gain around 500 pips, which is a 2.5:1 reward to risk ratio.

Before you start trading live markets, we strongly advise that you first trade virtual funds until you master trading volatile markets. This way, you will prepare yourself better, and protect your capital before you feel that you are ready to trade live.