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Trade Basics: Understanding Candlestick Patterns
Bottom reversal pattern: flat head bottom
Flat top and flat bottom are common candlestick pattern formations in stock price trends.
Because their shape resembles pliers, they are also called tweezer top and tweezer bottom.
We introduced the flat top in a previous lesson. This article will introduce the flat bottom (Tweezer Bottom) to everyone.
What is a flat bottom (Tweezer Bottom)?
The flat bottom (Tweezer Bottom) is a common dual candlestick bottom reversal formation, usually seen in a downtrend.
This formation consists of two consecutive candlesticks with the same lowest price. The candlesticks themselves can be solid or have lower shadows.
When the flat bottom formation appears, it may signal a short-term price bottom.
How does the flat bottom form?
When the price falls to a temporary new low or a historical new low, the bulls may start absorbing chips, thereby forming price support. If the bears fail to push down at the same price for 2 days (or several days) in a row, their strength will gradually weaken, allowing the bulls to take over the dominant position, thereby driving the price up. The market may then begin a rally in the upward direction.
A standard flat bottom pattern generally has the following characteristics.
At the bottom of a downtrend.
Composed of two or more consecutive candlesticks, which can be either bullish or bearish. Although the color of the candlesticks is not the most critical, some opinions suggest that the first candlestick of the flat bottom may be bearish and the second one bullish.
These candlesticks have the same or nearly the same lowest price, and can be solid bodies, shadows, or doji stars.
How to identify a flat bottom?
In actual trades, when identifying a flat bottom as a bottom reversal signal, the following steps can be taken:
Identify the downtrend: Find a clear downtrend before the pattern appears. If the flat bottom pattern appears at a market low point, the reversal signal may be more reliable.
Identifying the flat head and shoulders pattern: Find at least two consecutive candlesticks, where their lowest prices are flat. This indicates that this price level is supported, and the trend may reverse. If the first candlestick is a bearish one and the second one is a bullish one, the reversal signal may be more evident.
Combining with other technical indicators: If the flat head and shoulders pattern appears at the same time as other bullish candlestick patterns, such as bullish engulfing or piercing line, the likelihood of a bullish move increases.
Confirming the reversal with the third candlestick: Investors generally further confirm the bullish signal by observing the price trend of the third candlestick. If the third candlestick is a bullish candlestick, it may be the beginning of a bullish trend.
Case Study
The following is an example of a flat head and shoulders pattern that appeared on the daily chart of Airbnb (ABNB) stock.
On the chart, you can see that before the flat head and shoulders pattern appeared, the stock price experienced a significant decline, indicating strong bearish sentiment.
At the bottom of the downtrend, two consecutive candlesticks appeared, with their lowest prices almost the same, indicating that the stock price is supported at this level. Moreover, the first candlestick is bearish, and the second one is bullish, forming a flat head and shoulders pattern, which could be a signal of a price bottom.
To confirm the reliability of this reversal signal, you can refer to the price trend of the third candlestick. It can be seen from the chart that the third candlestick is a bullish one, providing further confirmation of the bullish signal.
After that, Airbnb's stock price indeed experienced a wave of upward trend.
Summary
A flat head bottom is a bullish pattern formed by two candlesticks, typically appearing at price bottoms.
However, this pattern is not 100% effective, and failures are also very common.
In actual trading, candlestick patterns should be combined with other technical analysis tools to better assist trade decisions.
