In the current age of trading, we can find many tools and guides to get more profit. One of the most widely used tools are the price graphs to determine the best points for a trade. Many traders are studying the charts by different means, like for example technical or intuitive.
The price behaviour can produce various formations on the charts, such as the popular head & shoulders, triangles, wedges, flags, etc. Among the classical patterns, we can also find the M and W price behaviour, which is very similar to the double tops and double bottoms.
In this article, we will only focus on the W pattern to know how it works and the special moment of a transaction.
What is the “W” pattern?
The W formation is a pattern that in many cases precedes a rise in market prices in an exponential way. At the moments when the lows are reached, high demand to buy the asset can occur. The great explosion in buying bids causes prices to rise abruptly thereafter.
The question is to know how to take advantage of the moment and to remain in a favourable position. For many, it is just a matter of waiting for the right kind of behaviour and then buying.
It’s good to have the probabilities in your favour
You must wait for the right moment to make sure that the potential ascent is safe. Wait for the rise to begin and make sure it is time to reverse to move up. Some traders may feel like this is a means to smaller profits, but at the same time, it significantly reduces their risk of being wrong.
It is not uncommon for the end of the W pattern to precede a period of resistance which could lead to the formation of an M pattern. Such cycles that occur in the markets can lead to some nice profits if both traded in both directions. Of course, such potential trades should be looked at in the larger context and consider if there is any prevailing larger trend that may cause one of the patterns to fail.
Ideally, to determine the reversal point, you should aim for a higher probability conditions. Define the maximum amount you want to place on your position and also considering the prospective profit targets.
Mind the potential risks with the “W” pattern
Establishing a maximum point decreases the risk of loss and that your position is not so compromising. The detail is that it is not infallible; there could be scenarios where this model could fail. It is essential to prepare for any mishap and be on the lookout for another opportunity.
The second thing that is recommended is not to put all the eggs in one basket. It involves dividing your trading capital and having enough money left for any opportunity or emergency that may arrive later. You may have been wrong time this time, but you can allocate another portion of your money for the next opportunity that comes along.
As noted, the method is excellent, but not fool-proof, and has a high probability of success. You can combine it with other tools you have available for better trades and higher profits.