For pattern traders, the W pattern is one of the more bullish chart formations you can find. Where do you stand when it comes to technical analysis? Some traders solely use technical analysis to trade stocks, while others consider it hocus pocus, merely lines on a chart.
Technical analysis can be a great tool, but it shouldn’t be the only thing you use when deciding on a trade. It can provide insight into the market behavior and sentiment for that stock. It can clearly show us where support and resistance levels are, as well as supply and demand areas. These give us a picture of what the market and its participants think about that stock.
It typically follows the same patterns that can forecast the potential path of a stock’s price. It isn’t 100%, but it is a pattern we often observe when a stock is about to enter a bullish trend. In this article, I’ll discuss this stock pattern, how to calculate it, and why you should look out for it when analyzing a chart.
What Is a W Pattern?
The W Pattern is a bullish harmonic pattern found on most stock charts at some point in time. Think of the letter “W” and imagine what this pattern might look like. It is characteristic of a bounce and retest of a key support area, commonly referred to as a double-bottom formation.
When this pattern forms on a stock chart, it usually indicates a trend reversal. Between the two bottoms, there is a level of resistance about halfway between the two tops. As a result, this is key, as it indicates a retest of the bottom support before rising higher into the newly formed uptrend.
It’s the potential bottom of a downtrend, hence the implication of the trend reversal. Note that while a bullish reversal often follows a W Pattern, it does not mean that the W is necessarily the bottom. We can observe a potential fake breakout and a continuation of the downtrend following the breakout.
What is the M Pattern?
If the W Pattern is a bullish formation, then the M Pattern is the bearish counterpart. Imagine a stock chart that is in an uptrend. A double tap of a resistance level and downward continuation is needed to form an M Pattern. Therefore, this is also commonly known as a Double top formation at the end of a stock’s uptrend.
Double Tops are less predictable and should only be used for short-term trading. As we know, the stock market has historically continued to rise over the long term. As a result, this is one reason I wouldn’t call a Double Top the final top for a stock or asset.
It should primarily signal a reversal of trend and sentiment, indicating that the short-term outlook for the stock is bearish. In a bull market, a breakthrough in the resistance level can easily negate double tops, and the market can pull the stock back into an uptrend.
How to Identify the W Pattern
Like most chart patterns, the W Pattern is not always something you can predict. Rather, it forms based on the stock’s organic price action. The W Pattern occurs frequently in technical analysis and has become a reliable signal for a change in trend and a potential bullish breakout.
To identify a W Pattern, the stock chart must currently be in a downtrend. The key to this pattern is for the stock to form an initial bottom. Note that bottoms are not predictable and are found in hindsight. Once a stock has established a bottom on the chart, you will want to see a quick bounce higher.
The key to the W Pattern is this middle bounce, which is rejection. Think of the shape of the “W,” and you will understand why this initial bounce is a failed breakout.
You will want to watch when this breakout fails to see if the stock respects the previous bottom formation. If it does, you have a double bottom on the chart and a high potential for a W Pattern formation. To confirm the completion of the W Pattern, you will want to see another bounce back to that area of the initial bounce off of the first bottom.
If these things come together, you will have a W Pattern. What does this signify? It means you’ve properly identified a trend reversal, which can be one of the most profitable trading strategies. A strong reversal in trend and sentiment can propel a stock price higher, driven by significant momentum.
W Pattern Trading Strategy
One of the most challenging aspects of trading is waiting for a trade setup. With a W Pattern, you must wait for two confirmed bottoms and a breakout above that middle resistance area. Why? Although rare, the stock can form a triple bottom pattern, which would negate a good entry at the previous resistance area.
The stock could also give a fake W Pattern and break lower depending on market sentiment. No chart pattern is safe if the market experiences a sell-off or sudden correction. Consider macroeconomic impacts and other near-term catalysts, such as seasonality or earnings reports.
When the second bottom forms, you will want to watch the price return to the resistance area, known as the neckline, a key indicator of the W Pattern. If it breaks above that neckline (the middle part of the W), then this is a great time to buy.
When this formation breaks through the neckline resistance, it has the potential for a strong move higher, as buyers step in on the trend reversal.
How Reliable Is It?
As with any other chart pattern, the W Pattern should not be the only reason to enter a trade. However, chart patterns such as the W Pattern and the double bottom formation are some of the more reliable patterns to use in trading.
The W Pattern is most reliable when you sense a shift in market sentiment from bearish to bullish. During these periods, you will find many charts with a double bottom forming. These should be breakout candidates with excellent potential.
The reliability of the W Pattern is also stronger on a higher time frame. When using technical analysis, daily, weekly, and monthly charts provide a more comprehensive picture of the stock’s price action than an hourly chart.
When in doubt, zoom out! If you see a W Pattern forming daily or weekly, there is a good chance this pattern will play out!
Does the W Pattern Work for Cryptos?
Yes! Generally, you can apply technical analysis to any asset chart, including cryptocurrencies. With cryptos, there is much more volatility and the potential for big overnight moves that can make or break a pattern while you sleep.
You can rely on a W Pattern for crypto charts. However, be warned that much more can change than with stock charts.
The W Pattern also works for other assets, including commodities, futures, and ETFs. A double bottom pattern on any asset chart is considered a bullish trend change regardless of the asset.
Is the W Pattern a Harmonic Pattern?
No! Or, not necessarily. Some harmonic patterns, such as the Bearish Bat pattern, take on the W formation. While they closely follow M’s and W’s, harmonic patterns rely more on Fibonacci sequences.
W Patterns rely on the strong double bottom move and a retracement. Harmonic patterns are exact moves between Fibonacci levels and require precise action on the charts. Some harmonic patterns look like W’s, but I would not say they are the same type of W’s as discussed in this article!
Final Thoughts on W Pattern
Regarding chart patterns, the W is one of the more consistent and reliable patterns. We refer to a double bottom and trend reversal when discussing this pattern. W Patterns occur at the bottom of a downtrend, marking an area where bulls can advance and push the price back.
The W Pattern can be used for most assets, including stocks, futures, and cryptocurrencies. It does require a little patience to play out, as you need the first test of support, a reversal, and then a second test of support to form the double bottom pattern. Once the price breaks past the middle resistance, entering the trend reversal is reasonably safe. Please ensure that you use proper risk management techniques when trading a W pattern.
Frequently Asked Questions
Ultimately, this will be a matter of personal preference for each trader. Some love to look for flags or pennants, which usually indicate which direction the price will move. Others prefer to use harmonic patterns or Fibonacci levels. Regarding patterns, the W Double Bottom Pattern is one of the most reliable patterns you can find on a chart!
