Last Updated on 21 September, 2020 by Samuelsson
Candlestick patterns have become popular tools for many traders, in their search for edges in the markets. One such candlestick pattern is the tweezer bottom.
A tweezer bottom is a candlestick pattern that forms as a bearish trend is turning bullish. In short, the pattern consists of a low point which is tested one to several times, which makes clear that bulls won’t let prices go lower. As such, the pattern may consist of two or more candles, as long as the low point is intact.
In this guide to the tweezer bottom, you’ll learn everything you need to know about the pattern, including its meaning, definition, ways to improve the performance, and trading strategies!
Tweezer Bottom Definition
A tweezer bottom forms in a developed bearish trend and may consist of several candles, although it’s traditionally seen as a two candle pattern. The only condition is that the low of the first candle is defended successfully and remains intact.
Here is the exact definition:
- The first candle has a significant lower wick. It may be bullish or bearish.
- The second candle may also be bullish or bearish, and revisits the low of the previous candle, without breaking it.
- As long as the low of the first candle remains intact and following candles retest that level, a tweezer bottom could consist of several more candles.
The common interpretation of a tweezer bottom is that it’s a bullish reversal signal, meaning that it signals an imminent positive trend.
What Does a Tweezer Bottom Tell Us About the Market?
Since all candlestick patterns are unique representations of market data, they tell us something about the market in which they’re found. And by analyzing and watching the price of a market, we may reveal some clues about why it moved as it did!
Now, while we may be very interested in knowing this as traders, we also have to understand that it’s hard to know the exact reasons behind market moves. However, that doesn’t mean that watching and scrutinizing market data is a bad idea! On the contrary, it will give rise to new ideas and concepts, that you may try and turn into trading strategies. In fact, this is how many of the trading strategies we trade right now came into existence!
So, let’s see what a tweezer bottom may tell us about the market!
To begin with, the market is in a bearish trend, meaning that market sentiment is mostly bearish, which is reflected as high supply and low demand, in turn pushing the market down. At this stage, most market participants are bearish, and believe in falling prices.
Upon the forming of the first candle of the tweezer bottom, nothing seems uncommon. The candle makes a new low, and then retraces a bit and closes higher.
As the second candle forms and never manages to break the low of the previous candle, but closes above it, we start to notice that something is changing. The bulls, despite being absent for some time, now seem to have gathered enough strength to defend a previous market low, which is a bullish sign.
How to Trade the Tweezer Bottom: How to Improve the Pattern
If there was one thing we would advise against, it would be to start trading patterns like the tweezer bottom without carrying out your own market tests. Most candlestick patterns need to be applied to the right market and timeframe to work well, and even then it might be necessary to add custom filters and conditions to make the pattern tradable. We suggest that you use backtesting for this!
Now, in this part of the guide, we’ll introduce you to some of the methods that we have had much success with in the past when trying to enhance patterns of different kinds.
When studying price data, we have access to data that describes how a market has moved. However, what we don’t get, is information about the force of each move.
Of course, we may gauge the conviction of a market by taking things like candle sizes and trading ranges into consideration. However, sometimes we find that using volume could lead to better results.
Generally, high volume is considered a sign of conviction in the market, while low volume shows the opposite. However, depending on the market and timeframe you’re working with, it could be that low volume works better than high volume, or the other way around. Again, you’ll have to resort to backtesting to get a definitive answer.
Here are the volume conditions that we have found the most useful:
- The volume of this bar is greater/lower than the volume of the previous bar- While being the most simple condition you could come up with, it’s surprisingly effective!
- Highest/lowest volume x bars back- This could be said to be a more powerful version of the filter above.
- Volume is over or below moving average – Sometimes we use a moving average of volume as the reference point.
While the three methods outlined above are quite similar, we have experienced a lot of cases when one seems to outperform the others by far!
Another powerful but often overlooked method that could bring drastic improvements to a strategy, is seasonality.
Many markets have some quite pronounced seasonal tendencies, be it on the hourly, daily, weekly, or monthly timeframe. And if we know of these tendencies in advance, we may use them to our advantage!
For instance, if we know that a market is prone to turning bullish by the end of each month, we may take a tweezer bottom more seriously if it forms around that time.
Now, when we look at seasonality, this is what we tend to look for first:
- Day of week- Are there any days that tend to be more bullish or bearish than others?
- Part of the month- Does the market behave differently depending on which part of the month it is? We like to divide a month into three pieces to see if there are any noticeable and significant differences!
- Hours- If your system is intraday, you might want to see if it performs better during the first or second half of the day.
As always, you should use backtesting to discover what works best with your market and timeframe!
Tweezer Bottom Example
Here follows a real-world example of the tweezer bottom pattern:
Tweezer Bottom Trading Strategies
Having covered some powerful techniques to improve the performance of the tweezer bottom, it’s now time to take a closer look at some trading strategies that use the pattern.
Now, while the strategies that are presented are great starting points, they are not ready to trade right away. Instead, we recommend that you take inspiration from the conditions and filters used to come up with your own strategy!
Trading Strategy 1: Tweezer Bottom With Bollinger Band Filter
One of the most powerful tendencies of equities is mean reversion. In short, mean reversion means that a market tends to move too much in one direction, and then correct its move by going in the other direction. Once a market has performed overly bearish moves, we say that it’s oversold.
Now, if we know that a market is becoming oversold, we could rightfully assume that a tweezer bottom is more likely to work out well!
So how may we define an oversold market?
Well, one common way is to use the Bollinger bands, and demand that the market is below the lower band, which is placed two standard deviations away below a moving average.
If you aren’t sure about how the Bollinger bands work, we recommend that you have a look at our definitive guide to Bollinger bands!
So, for this strategy, the rules to go long will be that:
- There is a tweezer bottom
- The close is below the lower Bollinger band
Then we’ll exit after 5 bars.
Trading Strategy 2: Tweezer Bottom and Range Condition
Another way to try and construct a trading strategy, could be by looking at the anatomy of the pattern. Since the tweezer bottom is all about defending a previous price level, it could be interesting to see how the market reacts around that level.
For instance, it could be regarded as a bullish sign if all the candles making up the pattern are formed with long lower wicks, signaling that bulls are strong and manage to defend the previous low.
This is the logic we’ll use for this trading strategy, with the following rules:
- There is a tweezer bottom.
- All the candles comprising the pattern close in the upper half of the candle’s range.
We then exit the trade after 5 bars.
In this guide to the tweezer bottom, we’ve had a look at not only the definition of the pattern, but also how you could go about to make it work in your trading!
Before we end, we just want to once again stress the importance of always verifying your trading strategies with backtesting, before going live with a system. Most traders don’t do this, and subsequently, lose money.
For those who are interested in learning more about profitable trading, we recommend that you have a closer look at our articles on swing trading, algorithmic trading, and how to build a trading strategy!