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Chart Pattern-based Systems for Binary Option Trading: the Tweezer

Chart Pattern-based Systems for Binary Option Trading: the Tweezer

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Estimated reading time: 4 minutes

Due to the nature of binary option trading, those trading without a tested and proven system never really stand a chance to generate long-term, consistent profits. Sure, the short-term variance may reward some of these gamblers every now and then, but because over the long-haul their mathematical expectation is negative, they’re doomed nonetheless. The bottom line: the use of a trading system is not optional. It’s a must. Trading systems are made up of several different components, and one of these could well be the Tweezer, a strategy based on a candlestick pattern known as the tweezer. As any chart-pattern-based trading system for binary options, the Tweezer comes with advantages and vulnerabilities, a major one of which is the relatively difficult nature of pattern-identification. Fortunately, in the case of the tweezer, there are a few ways to defeat the problems tied to pattern-identification – and I will cover those at the end of the article.

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Before all else though, we need to define the Tweezer pattern, and take a look at what it’s supposed to herald – after all, that’s what the system is based on.

There are two tweezer pattern variants: the tweezer top and the tweezer bottom. They both predict a trend-reversal: the tweezer top signals the end of a previously dominant bullish trend, and its reversal into a bearish one. The tweezer bottom on the other hand means that a bearish trend is about to experience a bullish reversal.

The tweezer top is made up of two candlesticks. The Day 1 candlestick is a bullish one, featuring a short wick under its body. The Day 2 candlestick is a bearish one, with a longer body than the Day 1 candle, but with its opening at the same level as the closing price of the Day 1 candle. The significance of the pattern should be obvious from this description: while the Day 1 candle is a continuation of the previous trend, the day two one sees sellers flood the market, destroying all the Day 1 gains and then some, thusly creating ripe conditions for a consistent trend-reversal.

The tweezer bottom is made up of two candles as well, and it is the upside-down mirror image of the tweezer top. Its Day 1 candlestick is a bearish one, with a wick above it. The Day 2 candlestick on the other hand is a bullish one, it’s longer than the Day 1 candle and its opening is on the same level as the closing price of the Day 1 candle. With that in mind, it’s easy to see how the Day 1 candle represents the continuation of the previous trend, at the end of which buyers flood the market, erasing all its losses and then some.

Now that you know and understand how the tweezer patterns develop, it’s easy to see how they can be used for the trading of the Call/Put contract, and – with a bit of tweaking – the Touch/No Touch contract as well.

Tweezer top

 

To keep things brief, we’ll only consider the tweezer top for trading purposes. Once you understand this, you’ll easily be able to transpose the process to the tweezer bottom through analogy.

First of all: with the tweezer top, only the Put component of the Put/Call contract can be traded (the reasons are obvious once you take a look at the attached illustration). Likewise, with the tweezer bottom, only the Call component can be traded.

Placing the Put trade is as simple as 1-2-3. Once the tweezer top pattern is spotted, place the Put trade right at the opening of the next candlestick. As you probably know, when it comes to expiry, one has to consider the time-frame used for the analysis. If you’re using an hourly chart for analysis, set the expiry on the Put trade to 4 hours.

Now then, for the Touch/No Touch trade, we’ll have to trace a horizontal line touching the top of the tweezer top candlestick pattern. Everything above this line falls into the No Touch zone, while everything below it belongs in the Touch zone. To make sure your trade will end up in profit, set the strike price for the No Touch trade some 30 pips above the said horizontal line. For the Touch trade, we’ll go 40 pips below the said line.

The expiry on the No Touch trade should be set to 2 hours (provided you’re using a 1-hour chart for analysis) and 6-8 hours for the  Touch trade.

While the theory is indeed simple enough for this system, in practice, actually spotting the tweezer top (or bottom) can be quite challenging. Fortunately, one can use additional tools to confirm the likely presence of a trend-reversal: the support and resistance levels are extremely handy in this respect, as are indicators such as the Oversold/Overbought stochastic oscillator. Using a combination of these three tools, one can refine his tweezer system to a point where it pretty much guarantees a long-term EV+.

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