Tweezer Top Candlestick Trading Tutorial and Example
The tweezer top candlestick pattern is another candlestick pattern that forms sporadically on the price charts of stocks, ETFs and market index. The word 'tweezer' refers to small-sized tools which are used for picking up objects too small to be easily handled with the human fingers. Their unique feature is that they have two-legs which are equal in size. The same is true for the candlestick pattern called tweezer top - they have equal values of high prices.
On the price charts, a tweezer top is a two-line pattern - that is, it is made of two candles which may be adjacent to each other, or there may be a few candles between them. These two candles have identical highs at the top of the market representing the tweezer tool, and since it refers to the high prices, the name goes as 'Tweezer Top'.
It is usually formed by the upper wicks (or shadows) of the two candles as they refer to the high price, but it can also be formed by the candle body in case the candle does not have a wick - that is, the high 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 top is not considered to be a strong signal in itself. One must wait for a confirmation candle to form next, to confirm whether the price have actually reversed or not. This article explains the details of how the tweezer top candlestick is formed, what market conditions are indicated by its formation, how to trade the tweezer top candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the tweezer top candlestick, let's start by checking the factors needed for its formation.
Construction of the Tweezer Top CandlestickThe tweezer top candlestick pattern is formed by two adjacent candles, or by two candles which may have 3-4 small-sized candles in between them. The first candle can be any size, any color candle which is a part of an ongoing uptrend. 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. After such a bullish candle, another candle gets formed which has its high price similar to the first one, then we have a tweezer top pattern. Again, this second candle should not be a four-priced doji, like the first one. Additionally, there can be a few small-sized candles in between these two candles having their high price same. Size and color of both these candles is irrelevant, but their high prices should be same or within close range of each other.
The next requirement for a reliable tweezer top pattern is that its first candle should form during an ongoing upward price move. Formation of a tweezer top candle pattern indicates that the price reversal is possible, and the ongoing trend of the green-colored candles is expected to come to an end. Many traders may like to wait for a third confirmation candle to be formed. If a red colored confirmation candle is formed, it further confirms the premise that the uptrend has ended and the prices are set to go downwards in near future. Its time to go short on the stock (sell), or cut the losses if already holding a long position. This is how a typical tweezer top candlestick appears:
Trading the Tweezer Top CandlestickThe tweezer tops form very rarely - so if you are able to spot one consider yourself lucky. It is also important to note that such a formation establishes the resistance zone for stock prices hitting the top. Here are the market dynamics that are at play which lead to the formation of tweezer tops.
The first candle in uptrend has its high value, say at $100. This means that in the ongoing uptrend, the high price of $100 was hit, and then the sellers pulled it down from that value. Then comes the formation of the next candle having similar high price of $100, which may be the next candle or may form after a few small candles in between. This confirms that the high price has not been able to breach the $100 mark, and market participants (both sellers and buyers) are unable to act in a manner to push the prices higher. Therefore, this constitutes the strong resistance range for the stock price. Even when there are other small-sized candles in between, they too are unable to breach this limit of $100, which further confirms the range of resistance in the upmove.
Next comes the role of the confirmation candle. If following an uptrend, there is a tweezer top pattern formed with two desired candles hitting the same high price, and that is followed by a bearish red-colored candle, it indicates that the buyers are losing out to the sellers, and price reversal is imminent in the short term. If either of the first, second and the confirmation candle is accompanied by a considerably huge volume, then it enhances the chances of price reversal. The sellers have returned to the market in full swing with high selling pressure, and hence they are getting stronger and are able to lower down the prices. Therefore, its time to go short - that is, sell the stock, or cut the losses if holding a long position.
The tweezer top candle pattern gains significance when formed during the uptrend. The formation sets the ground for a potential reversal in prices after the long upward move. Traders enter the trade when the tweezer top is formed at the upper Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout indicated by the length of the candlestick, the stronger the reversal pattern. If the tweezer top 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 top often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Tweezer TopThe following are the general considerations and scenrio for trading the tweezer top candlestick.
▶ Trade Entry: Formation of tweezer top during an uptrend is taken as a sign of reversal, that is - the market prices are expected to go down in near future. So traders try to take a short sell position at or around the high price of the tweezer top second candle. However, a few traders may like to wait for the confirmation candle to form, their selling price may be lower as the trend made the move which took the prices downwards. 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 top 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 top 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 top 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 top 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 Top CandlestickThe following chart shows an instance of tweezer top candlesticks and the uptrend that followed shortly after:
As one can observe, the formation of the tweezer top candle, where the two candles had similar high values, reversed the uptrend that preceded the first green candle, and led to a downward move indicated by the long red arrow. The trend reversal was also confirmed by another red candle which was formed immediately after the formation of the tweezer top candle pattern. 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 Top FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming tweezer top 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 tops as of the mentioned date (in reverse chronological order):
1) On Friday, Feb 21, 2020, the stock price of Health Care sector based Bristol-Myers Squibb Company (BMY) formed the following Tweezer Top Candlestick pattern:
|Previous High: $65.98|
Today's High: $65.87
See full details and past history of Tweezer Top Candlesticks for Bristol-Myers Squibb (BMY)
▶ Full list of stocks which most recently formed the Tweezer Top Pattern
2) On Tuesday, Feb 25, 2020, the price of Total Bond Market based iShares Core US Aggregate Bond ETF (AGG) ETF formed the following Tweezer Top Candlestick pattern:
|Previous High: $115.43|
Today's High: $115.58
See full details and past history of Tweezer Top Candlesticks for iShares Core US Aggregate Bond ETF (AGG)
▶ Full list of ETFs which most recently formed the Tweezer Top Pattern
3) On Thursday, Feb 20, 2020, the value of popularly tracked leading stock market index Russell 2000 (RUT) formed the following Tweezer Top Candlestick pattern:
|Previous High: $1,698.16|
Today's High: $1,698.91
See full details and past history of Tweezer Top Candlesticks for Russell 2000 (RUT)
▶ Full list of Market Indexes which most recently formed the Tweezer Top 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 top formations. Please see the full list of recent tweezer top formations for:
▶ Full list of recent Tweezer Top Stocks
▶ Full list of recent Tweezer Top ETFs
▶ Full list of recent Tweezer Top Indexes
The Bottom LineTrading candlesticks like the tweezer top 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 Top Candles for a particular: