Tweezer Bottom Candlestick Trading Tutorial and Example
The tweezer bottom candlestick pattern is a promising candlestick pattern that forms at random on the price charts of stocks, ETFs and market index. The word 'tweezer' refers to the small-sized tool which is often used in various tasks to handle small sized objects. Their unique feature is that they have two-legs which are equal in size. The same is true for the candlestick pattern called tweezer bottom - they have equal values of low prices on two candles.
On the price charts, a tweezer bottom is a two-line pattern - that is, it is made of two candles which may either be adjacent to each other, or there may be a few small-sized candles between them. These two candles have identical low values at the bottom of the market representing the tweezer tool, and since it refers to the low prices, the name goes as 'Tweezer Bottom'.
It is usually formed by the lower shadows (or wicks) of the two candles as they refer to the low price, but it can also be formed by the candle body in case of marubozu, that is - the candle which does not have a wick and whose low price is same as either the open price or the close price. These two tweezer forming candles can have small-sized bodies like those in dojis and hammer patterns. The longer the wicks or shadows of the tweezers, the more weight can be given to them for a price reversal in future.
However, one must note that tweezer bottom is not considered to be a strong signal in itself. One must wait for a confirmation candle to form next, which is used to further ascertain if the price has actually reversed or not. This article explains the details of how the tweezer bottom candlestick is formed, what market conditions are indicated by its formation, how to trade the tweezer bottom candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the tweezer bottom candlestick, let's start by checking the factors needed for its formation.
Construction of the Tweezer Bottom CandlestickIt may appear that only the low prices and hence the bottom wicks of the candle matter, but there's more to forming the tweezer bottom candlestick pattern. It is constructed on the price charts when two adjacent candles, or by two candles which may have 3-4 small-sized candles in between them, have same or almost similar low price value. The first candle can have any size and any color. The only exception is that it should not be the Four-priced Doji Candle which has all four of its prices (open, high, low and close) as same. Additionally, , this first candle should be a part of a downward price movement - that is price must be falling over the last few periods of observation.
After such a red-colored bearish candle forms, another candle emerges which has its low price similar to that of the first one, and then we have a tweezer bottom pattern. Again, this second candle should not be a four-priced doji, like the first one. Additionally, there may be a few small-sized candles in between these two candles having their low price same. Size and color of both these candles is irrelevant, but their low prices should be same or within close range of each other.
The next requirement for a reliable tweezer bottom pattern is that its first candle should form during an ongoing downward price move. Formation of a tweezer bottom candle pattern indicates that the price reversal is possible, and the ongoing trend of the red-colored candles is expected to come to a halt. Before entering a trade based on the emergence of the tweezer bottom pattern, many traders may like to wait for a third confirmation candle to be formed. If a green-colored confirmation candle is formed, it further confirms the premise that the prices are set to go upwards in near future and the downtrend has ended. Its time to go long on the stock (buy), or cut the losses if already holding a short position. This is how a typical tweezer bottom candlestick appears:
Trading the Tweezer Bottom CandlestickThe tweezer bottoms form very infrequently and are rare to spot - so if you are able to get one consider yourself lucky. It is also important to note that such a formation establishes the support zone for stock prices rebounding the bottom. Here are the dynamics of the market resulting in the construction of the tweezer bottoms.
The first candle in uptrend has its lowest value, say at $25. This means that in the ongoing downtrend, the lowest price of $25 was hit, and from that level the buyers (bulls) pushed it upwards. It was followed by the formation of the next candle which had a similar high price of $25. This repeat hitting of the bottom (say at $25) indicates that a large number of buyers are waiting in there to buy aggresively and confirms that the low price has not been able to breach the $25 level. The various market participants (both sellers and buyers) are unable to act in a manner to pull the prices further down. Therefore, this constitutes the strong support level for the stock price.
Even when there are other small-sized candles in between, they too are unable to breach this limit of $25, which further confirms the range of support during the downmove.
Next comes the prominence of the confirmation candle. If following a downtrend, there is a tweezer bottom pattern formed with two desired candles hitting the same low price level, and that is followed by a bullish green-colored candle, it indicates that the sellers are being outpaced by the buyers, and the chances of price reversal looks good in the near future. If either of the first, second and the confirmation candle is accompanied by a considerably huge volume, then it bumps up the chances of price reversal. The buyers have returned to the market in full swing with high buying demand, and hence they are getting stronger and are able to push up down the prices. Therefore, its time to go long - that is, buy the security, or cut the losses if holding a short position.
The tweezer bottom candle pattern gains significance when formed during the downtrend. The formation establishes the base for a potential reversal in prices after the downward move. Traders enter the trade when the tweezer bottom is formed at the breakout of the lower Bollinger band, or at the breakout of the trend-line (like 200-day moving average), or at the breakouts of any other suitable ranges. The larger the breakout indicated by the length of the candlestick, the stronger the reversal pattern. If the tweezer bottom is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the tweezer bottom often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Tweezer BottomThe following are the general considerations and scenrio for trading the tweezer bottom candlestick.
▶ Trade Entry: Formation of tweezer bottom during a downtrend is taken as a sign of reversal, that is - the market prices are expected to go up in the near term. So traders try to take a long or buy position at or around the low price of the tweezer bottom's second candle. However, a few traders may like to wait for the confirmation candle to form, their purchase price may be higher as the trend made the move which took the prices upwards. That's the tradeoff one needs to accept if waiting for a confirmation candle.
▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the tweezer bottom baby candle. Others who enter at a higher price should adjust the stop-loss proportionatly.
▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their tweezer bottom pattern trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.
▶ Market Conditions: Since the formation of the tweezer bottom candle pattern formation is rare in the stock market, there is no set list of parameters which can guarantee the formation of this candlestick. Along with the above mentioned tweezer bottom formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bearish (and subsequent) candle. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.
Example of Tweezer Bottom CandlestickThe following chart shows an instance of tweezer bottom candlesticks and the uptrend that followed shortly after:
As one can observe in the above chart, the formation of the tweezer bottom candle, where the two candles had similar low values, reversed the ongoing downtrend that preceded the first red candle, and led to an upward move indicated by the long green arrow. Additionally, there was a range breakout with large value which added to the possibility of the price reversal.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.
Latest Tweezer Bottom FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming tweezer bottom candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the tweezer bottoms as of the mentioned date (in reverse chronological order):
1) On Thursday, Jul 9, 2020, the stock price of Consumer Services sector based The Home Depot, Inc. (HD) formed the following Tweezer Bottom Candlestick pattern:
|Previous Low: $246.22|
Today's Low: $246.35
See full details and past history of Tweezer Bottom Candlesticks for Home Depot (HD)
▶ Full list of stocks which most recently formed the Tweezer Bottom Pattern
2) On Thursday, Jul 9, 2020, the price of Large-Cap based iShares MSCI ACWI ex US ETF (ACWX) ETF formed the following Tweezer Bottom Candlestick pattern:
|Previous Low: $44.56|
Today's Low: $44.38
See full details and past history of Tweezer Bottom Candlesticks for iShares MSCI ACWI ex US ETF (ACWX)
▶ Full list of ETFs which most recently formed the Tweezer Bottom Pattern
3) On Wednesday, Jul 8, 2020, the value of popularly tracked leading stock market index VIX CBOE Volatility Index (VIX) formed the following Tweezer Bottom Candlestick pattern:
|Previous Low: $27.25|
Today's Low: $27.24
See full details and past history of Tweezer Bottom Candlesticks for VIX (VIX)
▶ Full list of Market Indexes which most recently formed the Tweezer Bottom Pattern
...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for tweezer bottom formations. Please see the full list of recent tweezer bottom formations for:
▶ Full list of recent Tweezer Bottom Stocks
▶ Full list of recent Tweezer Bottom ETFs
▶ Full list of recent Tweezer Bottom Indexes
The Bottom LineTrading candlesticks like the tweezer bottom needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:
Search Tweezer Bottom Candles for a particular: