Another great forex trend reversal and continuation pattern…
SIGNAL: Bullish, Strong
The tweezer bottoms pattern consists of two individual forex candles:
Setup Candle: The first candle is either bullish or bearish and preferably occurs at the end of a significant push down in price. This candle represents a final surge downwards in price, with a failure back from the lows.
Confirmation Candle: the second candle is a bullish candle whose lower wick or peak price reached matches exactly or nearly exactly, that of the first candle. The longer the wick of the confirmation candle the stronger the signal, since this signifies greater rejection from the lows.
PSYCHOLOGY AND FUNDAMENTALS
The tweezer bottom pattern usually sets up at the end of a move down in price, whether that move is part of a long-term trend or a short term retracement. The two scenarios are:
- When it occurs at the end of a long run down in price it signals the exhaustion of the supply of sellers and the drawing in to the market of buyers. At this stage buyers will be more inclined to enter the market on the offer of a currency pair at comparatively cheap levels. In a classic bull/bear struggle the bulls prevail and price settles near the highs of the confirmation candle, and higher than the open of the confirmation candle.
- The tweezer bottom can also occur in an uptrend when price temporarily retraces, preferably to a support level. This temporary move downwards may be due to buyers taking profit, sellers moving into the market at the relatively inflated prices, or just normal cyclical market exhaustion as the buy orders thin out. Hence price moves down to a level where buyers are ready to once more start moving into the market, pushing price up again.
TRADE ENTRY & STOP LOSS
You can enter either a Buy Stop order 2 to 5 pips in front of the highest price the confirmation candle reached, or if you are confident enough of the move up you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips behind the low of the tweezer bottoms. This is a rough guide only: in volatile markets you may choose to extend the stop further out, and for much higher time frame charts such as the daily you may set stops 5 to 20 or even more pips behind the low of the tweezer bottoms.
The larger the bullish candle that confirms the pattern, the more likely price will move up. However, if the confirmation candle is extremely long you may have trouble getting in with a reasonable reward to risk ratio.
For example, you may have to set a stop loss of 50 pips to set the stop comfortably behind the low of the tweezer bottoms. If there is a strong area of resistance only 20 pips above current price action, you may consider this to be a low probability trade and pass on the opportunity.
Forex Candlesticks are the MARKET PULSE, defining current Price Action and the Market Sentiment that is driving price action. My candlesticks course covers the seven things you absolutely must know about this most basic building block of price action. It includes the AuthenticFX Forex Candlestick Glossary, the perfect tool for you to master candlestick patterns with: