W Pattern in Trading

W Pattern in Trading

A W pattern is a double-bottom chart pattern that has multiple swings both up and down in price that create the shape of the letter “W” on a chart of price action. This pattern usually has a strong downtrend before creating the W and then a strong uptrend on the chart after the W is fully formed.

W Pattern in Trading

Is the W pattern bullish?

Yes, the W is a bullish chart pattern, as it signals that two attempts were made on the key support area on a chart, and both attempts failed to break to the downside.

The W chart pattern is a bullish reversal pattern as a downtrend holds support after the second test and rallies back higher. This pattern is created when a critical price support level on a chart is tested twice with a rally between the two support level tests creating a visual W pattern on the chart. The W can be either rounded or have straight lines.

  • W chart pattern happens at the end of a downtrend that has likely gone on for weeks or months.
  • The first bounce-off support, where the price stops going down, is the first support level.
  • The first bounce and reversal in the downtrend are small and the short-term run-up is usually approximately 5% to 10% off the support lows on a daily chart time frame.
  • The first rally off the lows fails, and the price returns to that previous price support again.
  • The previous price support lows hold on the second test.
  • The second test of support must be confirmed by a reversal and swing higher, it’s only a potential pattern until support holds and the price rallies off the support with higher volume, and sometimes a gap up in price can happen after the second test of the previous lows holds.
  • A breakout back over the high price that occurred in the middle between the double bottom support tests is a full confirmation of the W reversal pattern. This is the level where a signal to enter long can be given. Other traders will attempt to buy early as the second bounce-off support happens. The early bounce can create a better risk/reward on entry but waiting until the middle resistance is broken confirms the new trend higher and increases the probability that the price will continue going higher.
  • A double-bottom chart pattern can take weeks and even months to play out with the middle rally resistance taking many different sizes and shapes.

Price action after confirming the double bottom can have a similar trend on the right side of the chart after the pattern forms as the previous downtrend on the left side of the chart before the pattern formed. The chart price action may start going sideways again after returning to the old previous trading range on the chart. After a new price base at previous highs, the uptrend can resume.

What does the W pattern indicate?

The pattern on the chart is an indicator that sellers failed to continue the downtrend on the chart on two attempts. The pattern shows holders were not willing to sell under the price of the support levels where the double bottom was formed.

How do you identify M and W patterns?

M patterns are formed when a double top occurs on a chart after two attempts to go higher fail and form a resistance zone. An M pattern is an inverse of the W pattern and is shaped like a rounded or straight letter “M” on the chart.

W Pattern in Trading

M patterns mark double tops on charts and the W pattern marks double bottoms on charts. Both the tops or bottoms can be irregular and just close in the price zone to one another. An M pattern has a higher probability of being a top when the second high is lower than the first one. A W pattern has a higher probability of being a bottom when the second low is higher than the first one. Both these show that the new high or low confirms a new potential trend.

Both these patterns are indicators of a change in the current trend on the chart as it fails to make either higher highs or lower lows on multiple attempts.