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Three Types of W Patterns

by | Oct 9, 2022

You’ve heard of the Double Bottom or W formation.

It’s one of the popular formations that many technical analysts use. And one I often use to spot trades with the MATI Trader System.

But if you dig deeper, there is a power to it.  

You’ll realise there are certain ways see which ones will perform better than the others…

Today, I want to break down the three types of W Patterns and how you can use it to spot high probability trades.

Let’s start with the basic one.

Type #1: Simple W Pattern

The simple W pattern starts off with the price of any market, making a big rounding bottom.

It then reaches the first high.

Next, the price fails to reach above it and instead it turns back down forming another rounding bottom.

The second rounding bottom pretty much makes the same level low as the first rounding bottom.

Once the price has reached this low, it turns back up and touches the high again…

This high is known as the resistance or a neckline.

This is the level where we’ll then wait for the price to break up and out of the formation.

That’s when we go long and hold until the price reaches the size of the entire Simple W Patterns.

The formula I use to determine the target is the follow:

Price target =

[(Neckline – Low of first rounding bottom) X 2] + Neckline.

When you see this formation there is a GOOD chance the price will break up and out and head to the take profit. I say around a 65% to 70% chance…

Second W Pattern is…

Type #2: Extended W Pattern

The main difference between the Simple W and the Extended W is where the low is for the second rounding bottom.

This is where the price low drops even FURTHER than the previous low.

We say that there was strong selling (supply) power, and the buyers were not strong enough to hold the previous support.

But then, the price turns around and goes to the high of the W Pattern. Once the price breaks up and out of the extended pattern there is a good chance the price will continue up until it hits the price target (as calculated in Type 1).

In my experience, this pattern works out around 50 – 60%. We call it a medium probability trade. And so instead of risking 2% per trade, I like to risk only 1.5%.

Not the best W pattern but it’s still a good setup to take a trade.

Moving on.

Type #3: Short Formed W Pattern

Unlike the Simple and the Extended W Pattern, this one is more ideal!

The Once the price forms the first rounding bottom and comes down, it approaches the low but never touches it.

Instead, it makes an even higher low before turning up and breaking through…

Then we’ll buy and hold the trade until it reaches the target (calculated the same as both W Patterns).

This Short Formed W Pattern is my favourite and has the highest chance of working out.

Why?

Because the sellers were unable to bring the price down to the previous low. And the buyers just took over showing the momentum wanted to stay up.

When you see this pattern it has a good 70% to 75% chance of working out.

NOTE: The reason why the Short Formed W pattern is NOT a Cup and Handle is because the second rounding bottom is more than 50% the height of the first rounding bottom.

Now you know how to use these W Patterns in your trading…

Did you find this article useful? Let me know by clicking here timon@timonandmati.com.

Trade well, live free.

Timon Rossolimos

Founder, MATI Trader

 

 

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