Tweezer Bottom Candlestick Pattern: Meaning, Interpretation, Trading and More

In this article, we will discuss

• What is the Tweezer Bottom Candlestick Pattern?
• Interpreting the Tweezer Bottom Candlestick Pattern
• Trading the Tweezer Bottom Candlestick Pattern
• Limitations of the Tweezer Bottom Pattern
• Tweezer Bottom vs Tweezer Top Candlesticks
• Conclusion

If you are a short-term trader who prioritises capitalising on short-term price trends, reversal patterns in candlestick charts can be extremely useful for you. This is because such patterns give you an early indication of when the prevailing bullish or bearish trend may reverse — thus allowing you to start riding the new wave in the market from the earliest possible price point. If you successfully capture a trend reversal, you can maximise your potential profits greatly.

This is especially true for bullish reversals, which is when the market sees the beginning of a new uptrend. Depending on the strength of this new uptrend, both traders and short-term investors can attempt to benefit from the upward price movement. To identify such upward reversals early on, you need to look for the relevant candle patterns.

One such pattern is the tweezer bottom candlestick set. In this article, we will take a closer look at this pattern, see how to identify the tweezer candlestick and how you can trade this signal.

What is the Tweezer Bottom Candlestick Pattern?

The tweezer bottom is a type of tweezer candlestick pattern that can signal an impending bullish reversal. It typically occurs at the end of a bearish or downward trend and consists of two candles in a distinct order — namely a bearish candle followed by a bullish candle.

The distinctive feature of the tweezer bottom pattern is that the two candles have equal (or nearly equal) lows. This leads to matching bottoms that make the pattern appear like a tweezer, which is why it is thus named. The bottom alignment generally occurs along the shadows of the candles, although the bottom of the candle bodies may also be aligned.

Let us decode what each candle in this pattern indicates.

• The First Candle:

This is a red or a bearish candle that is a part of the ongoing bearish trend. It is formed as per the expectations of traders and is in keeping with the prevailing market sentiment, which is predominantly negative. When you first notice this candle, you may not be aware that it precedes a possible short-term bullish reversal. It simply appears to continue the current downward trend.

• The Second Candle:

As with all reversal patterns, here too, it is the second candle that is pivotal to confirming the reversal to a bullish market. In the bottom tweezer pattern, the second candle is green or bullish. Its lowest point is the same as the lowest point of the previous bearish candle. In other words, the lower shadows of these two candles match. If the lowest point is the same as the opening or the closing price, these candles may not have a lower wick. In that case, the lower end of the real bodies will be aligned, leading to matching bottoms.

In terms of its appearance, this is how you can identify the tweezer candlesticks that are bottom-aligned. Now that you know how to spot the pattern, let us try to understand what the two candles in the tweezer bottom pattern indicate.

Interpreting the Tweezer Bottom Candlestick Pattern

The bottom tweezer candlestick pattern is a unique kind of bullish reversal pattern that positions the market for a short-term upward trend at the end of a long-term bearish trend. When the first red candle forms, it is an indication that the sellers continue to remain strong in the market. This results in the price falling during the intraday trading session, leading to the formation of a bearish candle.

However, on the next trading day, things change significantly. The price opens around the same level as the previous day’s closing (this leads to matching bottoms in the candle bodies). Alternatively, the price may open nearly around the previous day’s close but may fall further to match the previous day’s low. This leads to matching lower wicks/shadows.

The price level at which the bottoms of the tweezer candlesticks match forms a temporary support level. It indicates that the buyers are not willing to let the price of the stock fall below this level. So, the price rises upward from this point on the second day, leading to a green or bullish candle that closes well above the opening price.

However, the price on the second day rarely surpasses the highest price on the previous day. So, while the bullish reversal occurs, it may not be exceptionally strong. This is why the tweezer bottom pattern is often considered a sign of a short-term upward reversal instead of a prolonged bullish change in the market. If you want to leverage this tweezer candlestick pattern, you need to be prepared to exit your position before the market corrects itself and declines once more.

Trading the Tweezer Bottom Candlestick Pattern

To trade the tweezer bottom pattern effectively, you need to first focus on identifying this signal accurately on your candlestick chart. Once you have established that the pattern is indeed the tweezer bottom and confirmed it using additional technical indicators, you can set up a trade to leverage the potential upward reversal in the market.

For the sake of understanding how to trade this pattern better, let us consider the following price levels for the two candles in a tweezer bottom pattern.

• First candle low: Rs. 100
• Second candle low: Rs. 100
• Second candle high: Rs. 105

In this case, you can set up the trade using the entry, stop-loss and exit price points as outlined below.

• Trade Entry

Since you anticipate that the price will rise, it makes sense to enter a long position in the market. The ideal entry point will be slightly above the closing price of the second candle. In our hypothetical example, this will be slightly above Rs. 105 — say Rs. 105.50 or Rs. 106.

Alternatively, if you are a more conservative trader, you can wait for the next trading session to close to confirm if the trend is bullish before entering the market. However, keep in mind that the trend may often be short-lived, so you must capitalise on it before the upward momentum dies down.

• Stop-Loss Limit

The tweezer bottom candlestick can sometimes produce false signals or result in weak reversals. So, there is always the risk of the price falling sooner than you expect it to — without touching your target highs. Here is where a stop-loss can help. It limits the downside risk in your trade and caps the loss at an acceptable level.

Typically, the stop-loss limit for a trade based on the tweezer bottom pattern is placed just below the low of the candles. *In the aforementioned example, the low point is Rs. 100. So, your stop-loss price can be either Rs. 99 or Rs. 98, depending on how much risk you can afford to take.

• Target Price or Trade Exit

The target price is the point at which you choose to exit the trade. Ideally, it is chosen in such a way that you earn decent profits, which is why it is also known as the take-profit price. To find this price, you can look for the most recent resistance level and use that as the exit price. For instance, if the resistance level is Rs. 120, you can exit just below this level, at Rs. 119 or so.

Another way to find the ideal target exit price for your trade is to use a risk-reward ratio that you are comfortable with. For example, say you prefer a risk-reward ratio of 1:3. The risk in this scenario is the difference between your entry price and the stop-loss price, which comes out to be Rs. 8 (i.e. Rs. 106 — Rs. 98). So, the target price should be set at three times this range, which is Rs. 24 above the entry price. This would give you a take-profit level of Rs. 130 (i.e. Rs. 106 + Rs. 24).

That said, even if you opt for the risk-reward method of choosing your target price, it helps to also check the resistance level. This will ensure that you set a reasonable take-profit price for your trade instead of an overly optimistic one.

Limitations of the Tweezer Bottom Pattern

The tweezer bottom candlestick set may be reliable when you correlate it with other technical indicators. However, it also comes with some inherent limitations that you should be mindful of. Check out the downsides to the bottom tweezer candlestick pattern and see what you can do to work around these limitations.

• Limited Usage

The tweezer bottom pattern is generally reliable only when it occurs during a strong bearish trend. If you notice that this pattern has formed during a sideways market or when the price movements are choppy, it may be best to ignore it instead of formulating a trading strategy based on the pattern.

• Short-Term Reversal

Even if the tweezer bottom that is formed is genuine, the upward reversal it indicates may only be short-lived. This is because the buying pressure that builds up is often not strong enough to sustain a long-term bull run. This is reflected in the second green candle of the tweezer bottom pattern, which may be shorter than the first red candle.

• Low Standalone Success Rate

Since the tweezer bottom pattern only uses two trading sessions as its foundation, its standalone success rate in predicting reversals can be quite low. To work around this, make sure you also study other relevant technical indicators like MACD, RSI, moving averages and the like to establish an impending upward reversal.

Tweezer Bottom vs Tweezer Top Candlesticks

The tweezer bottom pattern is the opposite of the tweezer top pattern. The latter occurs at the end of a prevailing uptrend and acts as a signal of a bearish reversal. Let us see how the two tweezer patterns stack up against each other.

The differences outlined in the table above reveal that the two tweezer patterns are the exact mirror images of each other — both in terms of where the price matching occurs and in terms of the order of candles in the pattern. They also signal precisely the opposite trends in the market. However, it is crucial to remember that the new trend indicated by the tweezer candles is often short-lived.

Conclusion

The bottom-aligned tweezer candlestick pattern is only valid if it occurs at the end of a downtrend and if it has a red candle followed by a green one. Often, traders may mistakenly consider the opposite pair — with a green candle followed by a red one — as a tweezer bottom pattern. This can lead to costly mistakes in the market and result in significant losses because you may end up trading the wrong signal.

To avoid this issue, ensure that you verify the pattern you are planning to base your trade on. Additionally, you can also make use of technical indicators like moving averages, Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) to confirm the existence of a bearish market and a reversal to a bullish market. This will help you verify the reliability of the tweezer bottom pattern and avoid false signals more easily.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847