Tweezer Top Candlestick Pattern: Traders rely on technical analysis to analyze and predict the future movement of the price in the market. Candlestick patterns are a part of technical analysis preferred by traders to understand and predict the future price movement in securities.
Here in this article, we shall discuss the tweezer top candlestick pattern with its meaning, formation, and how to set up a trade with the pattern formation.
Tweezer Top Candlestick Pattern – Definition
The tweezer top candlestick pattern is one of the frequently appearing patterns. This two-candlestick pattern indicates a potential shift in the market sentiment and resistance to the price of the stock. This pattern gives an early indication of a potential bearish reversal. The two candles in this pattern are as follows-
- The first candle is bullish (green candle) which indicates the upward movement of the price.
- The second candle is bearish (red candle) whose high price is the same as the previous candle’s high price.
This pattern can appear anywhere or in any trend in the market but the strength of the bearish reversal indication is higher if this pattern is formed in an uptrend.
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Tweezer Top Candlestick Pattern – Formation
The formation of this pattern indicates a likely bearish reversal in the market. So, if market participants notice the creation of this pattern in a stock in which they have a long position, they may consider squaring off their position.
This pattern is often formed as a result of an exhaustion of the buying sentiment or the price reaching a resistance zone. Market participants can use the tweezer top pattern along with other indicators such as RSI to confirm a bearish reversal and enter a short position in the stock.
Market players must also remember that the emergence of this pattern in a sideways or turbulent market will lessen the possibility of a negative reversal because this pattern works with a higher probability if it appears in an uptrend.
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Tweezer Top Candlestick Pattern – Psychology
When the tweezer top candlestick pattern typically appears in an uptrend, the green candle in the pattern indicates that there is a purchasing pressure pushing the stock price higher. Here, the second candle fails to move above the high range of the first candle which typically suggests that buyers are getting exhausted and sellers may start to gain an upper hand in the stock.
The creation of this pattern indicates a shift in market mood, and buyers will be cautious as the shift in market attitude may result in an increase in the number of sellers.
Tweezer Top Candlestick Pattern – Strengths
There are a few situations where the formation of this pattern would have a stronger bearish reversal indication and those situations are as follows:
- After a significant uptrend- If the tweezer top candlestick pattern appears after a considerable uptrend in the stock’s price, there is a higher likelihood of a bearish reversal. This is because the formation of this pattern suggests the exhaustion of the buyers, and those who had taken a long position during the uptrend may start to book their profits.
- RSI at the overbought region- If the RSI is at an overbought level(above 70) when a tweezer top candlestick pattern is formed, there is a higher likelihood of price decline in the stock.
- Formation at a strong resistance zone- Resistance zones are formed when the price of the stock has reacted to a particular price more than once or the price went down after reaching that price more than once. A strong resistance zone is formed when the price has reacted to that price multiple times. So, if this pattern is formed in that zone, it shows that the price has reacted again and will probably not go above that price.
Tweezer Top Candlestick Pattern – Trading Ideas
Traders must ensure that the prior trend before the formation of the Tweezer Top candlestick pattern is an uptrend. Once this pattern is formed in an uptrend, the following are the guidelines to take a trade:
- ENTRY: When the price of the stock starts trading below the close price of the second candle of this Tweezer Top pattern, traders can enter a short position in the stock.
- TARGET: Traders can exit the trade when the price of the security reaches the immediate support zone. Once this level is reached, one can also book partial profits in the trade and hold on to the remaining position until the next support level.
- STOP LOSS: Traders can place the stop loss near the high price of this pattern.
Tweezer Top Candlestick Pattern – Example
In the above one-day chart of HDFC BANK, we can observe the formation of a tweezer top after an uptrend. As discussed in the article, the price saw a bearish reversal after the formation of this pattern.
At the time of the formation of this pattern, traders could have taken a short entry when the price went below Rs. 995.25 anf the stop loss was at Rs. 1007.35
Read more: Fundamental Analysis of JSW Infrastructure
Conclusion
In this post, we learned about tweezer top candlestick pattern, their significance, characteristics, and how to trade them. A tweezer top indicates a strong bearish trend, which the trader can confirm with the RSI indicator. It is also recommended that traders set a proper stop loss to manage risk if the trade goes against the analysis.
Written by Praneeth Kadagi
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