Forex Walkthrough

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.)


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