Forex Walkthrough

AAA

Trading - Tweezers

It's always most desirable to get in at the start of a trend, rather than to be at the end of it. That's why traders are always looking for early signals to get in the door as the market makes a turn. And some even desire a better edge, maybe looking to get in before a trend reversal starts.

One pattern that we're going to discuss in this section that can help support our inclinations that the herd may be changing directions is called the tweezer. Although it's relatively unknown to the mainstream, the tweezer may be one of the best indications that a short- (or long-) term trend may be nearing its end. The tweezer shares similarities with the more popular double top/bottom, and can produce high probability setups in the foreign exchange market. (Learn more about double tops and bottoms in Analyzing Chart Patterns.)

Double Tops/Bottoms: A Classic
One of the first technical formations that many traders learn about is the double top or bottom. Simply, the double top (or bottom) reversal is a pattern that tends to form after a prolonged extension upward (or downward). It signifies that the momentum from the uptrend has stalled and may be coming to and end. The following battle between buyers and sellers lasts temporarily and ends with buyers attempting a final push upward before we see the price action decline. This final push creates a second peak in an otherwise stable channel pattern, forming a double top. (Learn more about technical analysis in our Technical Analysis Tutorial.)

Figure 1 shows a textbook example of a double top in the EUR/USD currency pair. Here, the euro makes a high against the U.S. dollar just shy of the $1.6050 figure in April 2008. After two and a half months of stable, range-bound trading, buyers make a final push higher in July before surrendering to sellers. The result is a sharp and violent drop until final support is reached at just above the $1.2250 figure.



Figure 1
Source: FX Intellicharts


Tweezers: The New
Similar to the bearish diamond formation in popularity, tweezers (or kenuki) are relatively unknown, partly because they seem very similar to the double tops/bottoms. The key difference is in the timing of these two formations. Tweezers are normally used for the short term, and are composed of two or more consecutive candle sessions. Any more than approximately eight to 10 candle sessions and we may actually be looking at a double top or bottom formation. However, given the short time frame, complete tweezer formations tend to take shape rather quickly. Price is another important factor with the tweezer. In a top or bottom formation, the prongs have exactly the same high prices (in a tweezer top) or low prices (in a tweezer bottom). This idea is key as it establishes the fact that the price level itself was not broken. (Learn more in Introducing The Bearish Diamond Formation and Candlestick Charting: What Is It?)



Figure 2
Source: FX Intellicharts

In Figure 2, we have a classic tweezer top in the five-minute chart of the EUR/USD pair. After an advance higher from previous support of $1.3210, buyers seemed to be losing steam. As a result, the first high (point A) is set at $1.3284. After a short, four-session downturn, buyers attempted a final push higher, marking the second high (point B) at the exact same price of $1.3284. This falls within our definition of a top. The strength of the resistance, and fact that the price was tested again and was not able to break through, helps underlying selling pressure spark the short-term price decline.

Keep In Mind

1. The same high or low has to be tested (this is critical).

2. The formation follows an extended advance or decline.

3. Tweezer tops and bottoms tend to form with two or more candles.

4. Additional formations are better. Dojis or hammers that create the second peak will add to the signal as it confirms a shift in sentiment.

Trading the Formation
Now let's take a look at an application of the tweezer pattern in the market. Taking the GBP/USD currency pair, we see a perfect example in the short-term, five-minute charts (Figure 3). Here, the tweezer occurs relatively quickly with just two candle sessions following an extension lower from $1.4360 resistance.

1. The first low (point A) is established as the last candle in the downtrend closes at $1.4279 in the GBP/USD.

2. The second low (point B) is established as the following candle session opens at the $1.4279 low and does not proceed to break it. As a result, we have made the low price twice without violating $1.4279.

3. After the second candle session has closed, we place an entry two pips above the close price. A corresponding stop order will be placed just five pips below the $1.4279.

4. As a result, keeping with a 2-to-1 risk/reward profile, the take-profit point is at $1.4319 (point C), 30 pips higher.



Figure 3
Source: FX Intellicharts

For a slightly longer-term trade, an oscillator is typically a good confirmation tool. In Figure 4, we simply add a MACD to confirm our USD/CAD short-term trade opportunity. (For a refresher on MACD, read A Primer On The MACD.)

1. The first low is set at $1.2201 (point A).

2. The second low is set at $1.2201 (point B) three candle sessions apart. Confirmation of this trade opportunity surfaces as it appears a MACD bullish convergence has emerged (point X), lending an upside bias.

3. After the close of the second candle, we place an entry order two pips above the close price of $1.2207, or $1.2209.

4. At the same time, a stop order is placed five pips below the low at $1.2196.

5. The take-profit or limit order is placed 22 pips above, corresponding to a 2-to-1 risk/reward ratio at $1.2231 (point C).



Figure 4
Source: FX Intellicharts


|Conclusion
Although not widely used, the tweezer pattern setup is a great formation that can be used by the currency trader due to the more technical nature of the forex market relative to other markets. Opportunities to use the formation will arise support and resistance are tested. Adding strict discipline and rigid risk management rules will help these setups increase a trader's arsenal. (Take a look at 3 Technical Tools To Improve Your Trading to learn more technical signals.) Options


Related Articles
  1. Charts & Patterns

    Tweezers Provide Precision For Trend Traders

    How to use candlestick tweezer patterns for analyzing and trading financial markets.
  2. Forex Education

    Using Double Tops And Double Bottoms In Currency Trading

    Find out how to apply the two most common price reversal patterns to your trading.
  3. Forex Education

    Introducing The Bearish Diamond Formation

    Profit-taking opportunities abound using this lesser-known pattern. Find out how.
  4. Forex Education

    Forex Consolidation Trading - Trade The Calm, Profit From The Storm

    Capture quick profits with the powerful directional biases of these two patterns.
  5. Forex Education

    Moving Average Explosions

    Find out how you can profit from this short squeeze strategy.
  6. Charts & Patterns

    Analyzing Chart Patterns: Double Top And Double Bottom

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The double top and double bottom are another pair of well-known chart patterns whose names don't leave much to the imagination. ...
  7. Forex Education

    Make Sharp Trades Using Andrew's Pitchfork

    This technical indicator is underused in the currency markets, but it can help you isolate profitable opportunities.
  8. Forex Education

    Trading Double Tops And Double Bottoms

    We look at how Bollinger Bands help accurately project entry and exit points for pattern traders.
  9. Technical Indicators

    Using Bullish Candlestick Patterns To Buy Stocks

    These five popular candlestick chart patterns signal a bullish reversal in downtrend.
  10. Forex Education

    How To Interpret Technical Analysis Price Patterns: Triple Tops And Bottoms

    Triple and double tops and bottoms may be tough to spot, but once you learn them, they can be powerful patterns.
RELATED TERMS
  1. Tweezer

    A pattern found in technical analysis of options trading. Tweezer ...
  2. Chart Formation

    A graphical depiction of a stock's price movements over time. ...
  3. Diamond Top Formation

    A technical analysis reversal pattern that is used to signal ...
  4. Double Top And Bottom

    Chart patterns in which the quote for the underlying investment ...
  5. Shooting Star

    A type of candlestick formation that results when a security's ...
  6. Top

    The highest price level reached by a security, index of securities, ...
RELATED FAQS
  1. How are Tweezer patterns interpreted by analysts and traders?

    Understand the basics of the tweezer candlestick pattern and how analysts and traders interpret this common but unreliable ... Read Answer >>
  2. How do I build a profitable strategy when spotting a Tweezer pattern?

    Learn about the tweezer tops and tweezer bottoms and how to use these reversal signals with other technical indicators to ... Read Answer >>
  3. How effective is creating trade entries after spotting a Tweezer pattern?

    Understand the basics of the tweezer pattern, and learn why analysts and traders consider this unreliable reversal pattern ... Read Answer >>
  4. How effective is creating trade entries after spotting a Piercing pattern?

    Learn how to identify the candlestick piercing pattern and understand why it is considered a reliable technical indicator ... Read Answer >>
  5. What are the most common Bearish patterns used by traders?

    Discover some of the commonly used bearish chart patterns that traders identify as potential market turning points to the ... Read Answer >>
  6. How effective are double tops in spotting a change in the overall trend?

    Learn about the double top price chart pattern, a commonly appearing indicator used to establish resistance levels and possible ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center