Tweezer Top: Candlestick Pattern

Candlestick patterns are some of the most popular concepts in technical analysis, and come in many forms and shapes. One candlestick pattern is the tweezer top.

The tweezer top is a two candle bearish reversal pattern that occurs after an uptrend, and signals an imminent reversal of the trend to the downside. The pattern consists of two candles, where the first candle is bullish, and followed by a bearish or bullish candle that has the same high as the previous bar. 

In this article, you will learn everything you need to know about the tweezer top pattern. We’ll have a closer look at its meaning, definition, and how you bring the pattern into live trading. Let’s start!

Tweezer Top Definition

For a tweezer top to form, the following conditions apply:

1. The first candle is bullish, and forms in a bullish trend.
2. The next candle may be bearish or bullish. The important thing is that its high is the same or very close to the high of the previous candle.

The popular view on the tweezer top is, like we covered before, that it’s a bearish reversal pattern that signals a coming bearish trend.

This is how a Tweezer Top might look on a chart:

What Does a Tweezer Top Tell Us About the Market?

All candlestick patterns are unique and tell us different stories about the state of a market. Trying to understand what happened inside the market as a pattern like the tweezer top forms, is a great exercise! Viewing and scrutinizing has a tendency to beget new trading ideas, that hopefully will turn into tradable and profitable trading strategies. At least that’s often the case for us!

So let’s now depict a probable scenario of what the market has been up to as it forms the tweezer top pattern.

As the market comes from a bullish trend, market sentiment is mostly bullish, meaning that most traders and investors are mostly positive about the market. As such, buying pressure prevails, and pushes the market higher up.

However, since the market is entering into overbought territory, more people are becoming worried that the market will turn around soon. This leads to an increase in selling pressure, which prevents the market from going further up. Every time buyers manage to bring prices up to the levels of the previous high, sellers stand ready to push the market lower.

As market participants realize that the market lacked the strength to break above the previous high, they become worried that the uptrend has come to an end. As a result, a wave of sell orders enters the market and becomes the start of the new negative trend.

How to Trade the Tweezer Top: How to Improve the Pattern

While the tweezer top on its own is believed to signal a reversion of the trend, it might not be reliable enough to be used on its own. Most times you will have to add some type of filter or condition, to remove many of the bad trades. You also have to ensure that you trade the pattern on a market and timeframe where it works well.

The best way to find out where the tweezer top works, is with backtesting!

Having said this, let’s take a closer look at a couple of ways that you can filter out bad trades, to make the tweezer top signal you want to take!

Volume

Adding volume to your trading means that you add information to your analysis that you didn’t have access to before. With volume, you not only know how the market moved, but also the conviction behind it. If the volume is high, it signals that a lot of market activity supported the move we see. And as such, we might consider it more significant, and worth our attention.

However, in our own research, we have found that this not only is the case and that a strategy or pattern could work better with low than high volume.

Again, you will have to find out what applies to your specific market and timeframe with backtesting.

Now, these are the volume filters that we have come to use in a lot of our trading strategies:

1. Volume is higher or lower than the volume of the previous bar. You may use a multiplier to demand a bigger difference. For example, you could demand that the volume of this bar is higher than the volume of the previous bar times 2.
2. The moving average of the volume is rising or falling
3. Volume is at its highest or lowest reading x-bars back.

Try and see for yourself what works best with your market!

Oversold and Overbought Readings

Something that we use a lot in our strategies, are momentum indicators that tell us if the market is overbought or oversold.

Generally, oversold and overbought are terms that describe markets that have moved too much to the upside or downside. A market that’s overbought has been pushed up to heights were it’s likely to turn down. Similarly, a market that’s oversold has been pushed down to levels where it’s likely to turn to the upside.

Now, depending on if the tweezer top forms in oversold or overbought conditions, it could work better or worse.

However, since it’s a reversal signal, it’s most likely that’s it’s going to work better when the market is overbought.

So, how could you define an overbought or oversold market?

Well, here follow some common ways

1. Use RSI: An RSI reading above 70 is generally regarding a sign of an overbought market, while a reading of less than 30 signals the contrary.
2. Use Stochastic: Stochastics is another indicator that’s quite similar to RSI. Readings below 20 are considered oversold, and above 80 is overbought.
3. Price action: You may also use price action. For example, you could demand that the high of the tweezer top is the highest high 10 bars back. Such a condition would suggest that the market is overbought.

Use the three methods above as inspiration to come up with your own. Perhaps yours will work better?

Tweezer Top Trading Strategies

Now that we have shown you some ways to filter out bad trades with the tweezer top pattern, we just wanted to show you a couple of trading strategies that rely on it.

While the strategies provided are not meant for live trading, they will hopefully serve as inspiration. If we were to build a trading strategy with the tweezer top pattern, the strategies below certainly would be a good way to start.

Having said this, let’s have a look at two tweezer top trading strategies.

Trading Strategy 1: Tweezer Top With Confirmation

Now, some traders won’t act on reversal signals in general before the market has begun to turn around. In other words, they’re waiting for some type of confirmation.

Now one type of confirmation could be that the market closes below the low of the pattern’s range. In the image below, the low of the pattern is marked.

So, to place a trade, the following conditions must be met:

1. There is a tweezer top
2. The market breaks down below the low of the pattern.

Then we exit the trade after 5 bars.

Trading Strategy 2: Tweezer Top With ADX filter

One concept in trading that has proven itself useful for us many times, is volatility. A highly volatile market will often behave quite differently from a calm one, not only in the sense that the moves get bigger.

In the case with the tweezer top, it might be that high volatility coupled with a positive move increases the chances that the market is depleted off buying pressure, and soon is headed lower.

As such, in this strategy, we’ll use a ADX, which is a volatility indicator, to only enter a trade if there is high volatility.

We go short if:

1. There is a tweezer top
2. ADX is higher than 25, signaling high volume.

Then we exit the trade after 5 bars.

Ending Words

In this article, we’ve had a close look at the definition and meaning of the tweezer top. We’ve also covered some methods to enhance the pattern for live trading.

Before we end the article, we just wanted to advise you against trading strategies and patterns that you haven’t validated. Most popular concepts in technical analysis don’t work at all, which makes backtesting an indispensable part of every trader’s toolbox.

FAQ

What is the tweezer top pattern?

The tweezer top is a bearish reversal candlestick pattern that occurs after an uptrend. It consists of two candles, where the first is bullish, followed by a bearish or bullish candle with the same high as the previous bar. This pattern signals a potential reversal of the trend to the downside.

What does a tweezer top tell us about the market?

The tweezer top indicates a shift in sentiment after a bullish trend. As the market enters overbought conditions, concerns about the sustainability of the uptrend arise. Sellers resist further upward movement, leading to a failure to break above the previous high and the start of a new bearish trend.

How can traders improve the reliability of the tweezer top pattern?

While the tweezer top signals a reversal, additional filters can enhance its reliability. Traders may consider using volume analysis, checking for overbought or oversold conditions, and implementing confirmation criteria to filter out false signals.