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What is the Tower Pattern?

Tower Top and Tower Bottom Patterns

The Tower candlestick pattern is a trend reversal pattern that consists of four or more candlesticks. It is similar in appearance to the Advance Block pattern, the Deliberation or Stalled pattern, and the Ladder Bottom pattern. The difference is that the other candlestick patterns are triple candlestick patterns.

As with the Advance Block, Stalled patterns and Ladder Bottom, the Tower pattern is a trend reversal pattern that it is only significant if it appears in defined trend. Should the Tower pattern appear in an established uptrend, it becomes a Tower Top pattern, which is the bearish top reversal version of the pattern; and should it appear in an established downtrend, it becomes a Tower Bottom pattern, which is the bullish bottom reversal version of the pattern.

The Tower Formation

The Tower formation consists of four or more candlesticks of which the first is a relatively large candlestick with a large real body that is supportive of the current trend. This candlestick can be a Marubozu or it could have some upper or lower shadows. This candlestick is followed by a series of successively smaller candlestick that make successively smaller price gains or declines. The last candlestick is another large candlestick with a large real body but this candlestick closes against the trend.

The Tower Top Pattern

The Tower Top pattern is the bearish version of the pattern that can appear in an established uptrend. The first candlestick in the Tower Top is a relatively large bullish candlestick with a large real body with little or no shadows. This candlestick is followed by a series of smaller candlesticks with relatively short real bodies that do not move the market higher in any significant way. These candlesticks are followed by another relatively large candlestick that is bearish and dark in color, forming the second tower of the pattern. The overall pattern forms a top with a tower on either side of the pattern. It can also form a rounding top.

What the Tower Top tells us

The Tower Top appears in an established uptrend where the bulls are in control of the market. The first candlestick in the pattern illustrates the continued strength and conviction of the bulls. However, it is followed by a few smaller candlesticks that do not drive the market much higher. These candlesticks imply weakness in the uptrend as the bulls are beginning to struggle in their efforts to move the market higher. The appearance of the bearish tower suggests that the bears are beginning to take control, with the size of the last candlestick reflecting the extent of their strength.

Essentially, the smaller candlesticks between the two towers indicates that the bullish market sentiment has started to wane. The second tower confirms that the market sentiment has shifted and a bearish trend reversal can now be anticipated.

Trading the Tower Top Pattern

The Tower Top warns that there is weakness in the current uptrend and forewarns of a possible transition to a trend reversal. This implies that the bullish uptrend coming to an end is more likely than it continuing. Traders that are holding open long positions should, therefore, look the exit their positions on the opening of the candlestick that follows the Tower Top.

Traders would now be anticipating the emergence of a downtrend and will be looking to be short, which means they will be preparing to place sell orders. However, the trader should wait for confirmation of the pattern before placing a sell order. This confirmation would be a price break below the low of the pattern or a candlestick that closes below the low of the Tower Top, after which the trader could place a sell order on the open of the following candlestick.

Since a short position would be taken against the current trend, a protective stop-loss order should be used to limit the risk of the pattern failing. This protective stop could be placed just above the highest high of this candlestick formation as a price break above this level would negate the pattern. If the placement of the protective stop-loss is too far from the entry to provide a favorable risk/reward ratio, the trader could wait for a possible pull-back towards the high of the pattern before entering the trade. This would place the entry much closer to the protective stop and would reduce the capital at risk on the trade, though there is no guarantee that a pull-back will occur. Remember that confirmation of the pattern must first be obtained before placing a sell order.

The Tower pattern does not provide a clear profit target. Instead, a trader could implement a profit target based on a defined risk/reward ratio, a measured move, or some other trading mechanism can be used to exit the trade. This could be a Fibonacci retracement level, the appearance of a bullish candlestick formation, or a simple trailing stop.

As with most trend reversal patterns, the Tower pattern becomes more reliable depending on where it appears on the price chart in relation to trend lines, pivot points, and support and resistance lines, etc. A Tower Top pattern at or near an upper trendline or resistance line can be used in anticipation that the test of the trendline or resistance line is not likely to break it. The resulting price decline following the failure to break the trendline or resistance line should give greater impetus to the pattern. Also, if the Tower Top pattern is formed at an all-time high, it becomes more significant as the market could be overbought. Here traders can use the Tower Top pattern in conjunction with an oscillating indicator, such as the RSI, that shows the security to be overbought.

The Tower Bottom Pattern

The Tower Bottom pattern is the bullish version of the Tower pattern. It should appear in a well defines downtrend for it to considered a significant reversal signal. The first candlestick in the Tower Bottom pattern is a relatively large bearish candlestick with a large real body that is supportive of the underlying downtrend. This candlestick is followed by a series of smaller candlesticks with relatively short real bodies that do not move the market much lower. These smaller candlesticks are followed by another relatively large, bullish candlestick that forms the second tower of the pattern. The overall pattern forms a bottom with a tower on either side of the pattern. It can also form a Rounding Bottom.

What the Tower Bottom tells us

The Tower Bottom appears in an established downtrend where the bears are firmly in control of the market. The bears' strength is reflected in the first candlestick in the pattern with the size of the first candlestick illustrating the extent of the bears strength. However, the smaller candlesticks that follow the first candlestick suggests that the bearish market sentiment has started to wane as the bears are unable to drive the market lower. By the time the second tower appears, the market sentiment has turned bullish. Now the size of the candlestick the forms the second tower reflects the extent of the strength of the bulls. A bullish trend reversal can now be anticipated.

Trading the Tower Bottom Pattern

Trading the Tower Bottom is the inverse of trading the Tower Top. Here the Tower Bottom indicates weakness in an existing downtrend and implies a probable end of that trend. Traders holding short positions should be looking to cover their short positions on the open of the candlestick that follows the Tower Bottom formation.

Traders would now be anticipating the transition to an uptrend and will be looking to go long, which means they will be preparing to place buy orders. However, a trader should wait for confirmation of the pattern before placing a buy order. This confirmation could be a price break above the high of the pattern or a candlestick closing above the pattern. Therefore, the trader would place a buy order once confirmation of the pattern has been obtained.

As a long position would be taken against the current downtrend, a protective stop-loss order should be used to limit the risk of the pattern failing. This protective stop could be placed just below the lowest low of the Tower Bottom formation as a price break below this level would negate the pattern.

If the protective stop-loss is too far from the entry to provide a favorable risk/reward ratio, the trader could wait for a possible retracement back towards the low of the Tower Bottom before placing a buy order. This would place the entry much closer to the protective stop and would reduce the capital at risk on the trade, though there is no guarantee that a retracement back towards the low will take place. Remember that confirmation of the pattern must still be obtained before a buy order is placed.

The Tower pattern also does not provide a profit target but a trader could implement a profit target based on a measured moved defined by an acceptable risk/reward ratio or some other trading mechanism can be used to exit the trade. This could be a Fibonacci retracement level, the appearance of a bearish candlestick formation, or a simple trailing stop.

The Tower Bottom becomes more reliable depending on where it appears on the price chart in relation to trend lines, pivot points, and support and resistance lines, etc. A Tower Bottom that forms at or near a lower trendline or a support line can be used in anticipation that the test of the trendline or support line is not likely to break it. As a result, the price should be expected to climb, giving greater impetus to the pattern. Also, if the Tower Bottom pattern is formed at a low-price level or in an extended downtrend, it becomes more significant as the market could be in an oversold condition. Here traders can use the Tower Bottom pattern in conjunction with an oscillating indicator, such as the RSI, to confirm that the security is oversold.

As always, disciplined money management should be exercised when trading the market.