What is the Double bottom or W pattern and how to work?
The double bottom or W pattern is a bullish reversal chart pattern, which looks somewhat like the English letter W. The double bottom pattern is most commonly used in intraday trading and swing trading. The accuracy of the W pattern is almost 70-75%. Where once the stock or index forms the wW pattern. It becomes easier to move. Due to which bullish trend or rise is seen in the stocks.
Let’s understand the Double bottom or W pattern.
Understanding the double bottom or W Pattern:
The price drops to a low point from the resistance level.
It then rebounds to a higher level.
The price falls again, usually to around the same level as the first low level or support zone.
Finally, it rises again, typically surpassing the middle peak.
Think of it like a rollercoaster that goes down, up, down again, and then shoots up higher than before.
How to Identify a Double Bottom W Pattern?
Two distinct bottoms at roughly the same price level.
A notable peak between the two bottoms.
The second peak should be higher than the first.
Remember: these patterns can form over different time frames, it may be 5 5-minute or 15 min, or 1-hour time frame.
How to Trade with Double Bottom or W Pattern?
Now that we know what a double bottom W pattern looks like, let's talk about how to use it in your trading. Here's a friendly guide to get you started:
What should be an Entry Point?
The best time to enter a trade is usually when the price breaks above the middle peak of the double bottom or W shape. This suggests that the upward trend is likely to continue.
What should be Stop Loss?
To protect yourself from potential losses, you might want to set a stop loss just below the second bottom of the W. This way, if the pattern doesn't play out as expected, you can limit your downside.
What should be the Target Price?
As for your target price, a common approach is to aim for a move equal to the height of the W pattern (Point of total W pattern height). For example, if the distance from the bottom to the middle peak is Rs 20, you might set your target Rs 20 above the breakout point.
What are the benefits of Trading with W Pattern?
Using the W pattern in your trading can have some great advantages:
It's easy to spot once you know what to look for and when you have to enter for good profit.
It gives a clear entry point and stop loss level.
The pattern often suggests a strong upward trend is forming.
Potential Risks and Limitations
False breakouts can happen, where the price moves above the middle peak but then fall back down, so you have to be aware of the overall market.
The pattern might not always lead to a significant upward move.
Market conditions and other factors can affect how well the pattern works.
Common mistakes, you have to avoid
Jumping in too early before the pattern completes, wait and watch for the perfect entry.
Ignoring the overall market trend or any event.
Not using proper risk management, trading without stop loss, and deploying all funds at a time.
Expecting every W pattern to work perfectly, which is not possible.
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