With the fear and uncertainty of a possible Brexit, GBP/USD has been one of the worst performing currency pairs this year, falling as low as 1.38 in late February.
However, recent weeks has seen the currency stage a comeback, taking the market back to the important 1.4600 level as traders bet the pessimism was overdone.
On Tuesday though, the currency undid four days worth of gains, losing around 0.47%.
Helped along by poor manufacturing data and an ICM poll which indicated 45% in favour of a Brexit, the currency fell back under the 1.46 level and has now formed a rare bearish pattern on the daily chart in the form of a tweezer top candlestick formation.
Tuesday’s Tweezer Top
The tweezer top is a Japanese candlestick formation that is supposed to be a bearish indication because it shows a complete switch in momentum from bulls to bears.
To be a tweezer top, a market must first be in an uptrend then have have two opposing candles.
The first candle should be a white up candle and the second candle should be a black down candle that opens at the same price as the first candle’s close and closes below the first candle’s open.
This is a particularly rare pattern that does not occur very often. As you can see from the chart, we just saw a clear tweezer top pattern form in GBP/USD:
The currency is in a clear up trend and opened at the same price as the previous close on Tuesday. It then closed below the previous candle open. (Note, that the fact the currency spiked above the previous candle high does not disqualify this from being a tweezer top.)
How Good Is The Tweezer Top Pattern?
Most experts in candlesticks suggest that the tweezer top pattern is a strong bearish formation, however, empirical evidence as to whether this is actually true is thin on the ground.
Luckily, with Amibroker we can define the pattern in code and see how good this pattern really is.
Testing The Tweezer Top On GBP/USD
In order to test the tweezer top I put the pattern into Amibroker code then tested the formation on GBP/USD data going back to 1992.
The pattern requires an uptrend which I decided would be the presence of a new 10-day high.
Uptrend = H > Ref(HHV(H,10),-1);
TweezerTop = (C1>O1) AND (O>C) AND (O==C1) AND (C<O1) AND Uptrend;
Tweezer Top Results
As I mentioned already, the tweezer top is a very rare pattern and it only occurred 9 times on GBP/USD between 1992 and 2016 (on the daily chart).
The table below shows the average profit or loss from shorting a tweezer top pattern on the close (in GBP/USD) and then holding the trade for 1, 3, 5 or 10 days:
As you can see from the results, the tweezer top pattern only occurred 9 times and it was a losing signal overall.
Shorting the tweezer top pattern on the close then holding the trade for 1 day produced an average loss of -0.07% in GBP/USD with an average win rate of 33%.
With a 5-day holding period, the loss was -0.34% per trade and with a 10-day holding period the loss was -1.19% per trade.
The only time the pattern worked was with a 5-day holding period and the average gain was only 0.04% per trade.
When we factor in trading costs, these results will be even worse.
The results indicate that shorting a tweezer top pattern in the GBP/USD currency pair has not been been a profitable trade over the last 20+ years. In fact, the signal seems to work better in reverse. In other words, it might be better to go long instead of short when a tweezer top occurs. Doing so would have returned an average profit of 1.19% per trade over 10 days.
However, the rarity of this pattern means we only have a very small sample size to base our decisions on. All in all, it might be best to avoid this pattern today until we have more data.
Tests in this article created with Amibroker using historical data from Norgate Premium Data, get a free trial here.
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