The Tweezer Tops Candle Pattern: Another great forex trend reversal and continuation pattern…
SIGNAL: Bearish, Strong
The tweezer top candlestick 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 upwards in price. This candle represents a final surge upwards in price, with a failure back preferably to lows near where the candle began. At this stage the fact that it is a final surge is unconfirmed.
Confirmation Candle: the second candle is a bearish candle whose 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 highs.
PSYCHOLOGY AND FUNDAMENTALS
This candlestick chart pattern usually sets up at the top of a move up 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 up in price it signals the exhaustion of the supply of buyers and the drawing in to the market of sellers. At this stage sellers will be more inclined to enter the market on the offer of a currency pair at comparatively expensive levels. In a classic bull/bear struggle the bears prevail and price settles near the lows of the confirmation candle, and lower than the open of the confirmation candle.
- Tweezer tops can also occur in an downtrend when price temporarily retraces, preferably to a resistance level. This temporary move upwards may be due to sellers taking profit, buyers moving into the market at the relatively deflated prices, or just normal cyclical market exhaustion as the sell orders thin out. Hence price moves up to a level where sellers are ready to once more start moving into the market, pushing price down again.
TRADE ENTRY & STOP LOSS
You can enter either a Sell Stop order 2 to 5 pips in front of the lowest price the confirmation candle reached, or if you are confident enough of the move down you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips behind the high of the tweezer tops. 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 high of the tweezer tops.
The larger the bearish candle that confirms the pattern, the more likely price will move down. 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 high of the candle tops. If there is a strong area of support only 20 pips below 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: