W Bottom and M Tops Strategy
Hello, traders. Welcome to the Price Action Course and the six-module Price Action Strategies.
Well, in this lesson I’m going to teach you how to trade the W-bottoms and the M-tops methods to fade a move. Now, these methods are very strong on an intra-day basis, and up until now we are talking about strategies that work better on a higher time-frame. They do still work intra-day, on an intra-day basis but the W-bottoms and the M-tops are what works best when you’re trying to fade a move intra-day. And let’s say for example that you are just following a very strong down-movement and you’re trying to get in on that move. Well, you can find an M-top at the end of the corrected move or you can find a W-bottom at the end of the down-move at very strong either support, or resistance levels and then you will have a very strong immediate countertrend trading pattern or setup.
Now, let’s go through what they look like and what they mean. Well, M-tops and W-bottoms are the most trusted intra-day trading techniques. Unlike double- or triple-tops and bottoms, M-tops and W-bottoms appear on a daily basis on the lower timeframe chart. This means that you don’t have to wait day in and day out for a double top to form. And if you are looking at a double top or a possible double top, for example, on the higher timeframes, it might take a week for it to form and it might not break at all. But with W-bottoms and M-tops, you are going to have very fast setups on an intra-day basis that are going to get you to your targets very fast.
Remember that when we’re talking about price-action tradings, we always work with targets unless we are swing-trading this market, which we are not in this case. Now, this doesn’t mean that they aren’t good on a higher timeframe, countertrend trading patterns, because they are. What we aim to teach, is to use the setups on a daily basis on the lower timeframes or the one-hour and 15-minute charts. And, of course if you are scalping the markets you can use them on the five-minute charts, the one-minute charts, et cetera. But these patterns, or any pattern at all, is very strong. Well, it’s not very strong on the very lower timeframes. If you are trying to scalp the market, well, that is a completely different animal, and you will learn it at scalping and day-trading course.
The idea behind this strategy is that when price hits a level, it’ll test it twice and the second time will be the shallowest. In an auction, for example, buyers try to break with a level of resistance, only to be pushed back by sellers. If the second attempt to break is shallower and then the sellers take control of the market, rolling it over. So here’s the opportunity for you to capitalize on a fade.
Now let’s go through an example of what this must look like and then we’re going to go to the charts and we’re going to look for the setups on the one-hour chart and the 15-minute chart may be on the EUR/GBP.
Now here’s an example of a W-bottom. As you can see, price comes back while it’s going on a down move and these two black lines show us a very strong level of support and then price hits the level of support. Of course, we encounter the buyers that we weren’t supposed to encounter right here so price starts to fade back. Now, here’s what’s critical. Whenever price hits a level of support and it fades back, it doesn’t mean that we have shifted or the market has rolled over. This means that this zone where buyers were met, was also the zone where sellers were taking profit which means that, on top of the buying pressure, we have sellers giving up on this market and price is going to come up.
Now when price comes up, a new batch of sellers is going to come into the market trying to push price to break with this area of support. But then you can see that the second wave is shallower which means that we’ve failed to break this low, and we’ve failed to make a lower low, and thus buyers take control of the market and push the price up. And when we break with this high, which is the neck line, we have the setup for us to go long and in this case, if from the lowest points to the neckline, we have 27 pips, we are going to have a 27-pip target.
And the same goes for an M-top. You can see that the price attempts to break with the level of resistance, then because of buyers taking profit and sellers coming into the market, price goes down. Then the second attempt to break above is shallower, giving us what could be an M-top and the pattern, or the setup, is complete once we break with the neckline and in this case we have a 32-pip high/low on the pattern, so our target is going to be 32 pips.
Now, let’s go to the charts and let’s try to see this work in a live story chart. Okay, traders, so this is the EUR/GBP one-hour chart and as you can see right now we are at a very low of .7382. And the market is closed right now because it is Friday and the weekend has started. And what we’re going to do here is we’re going to try to find and spot W-patterns. Because we are in a down move, we are going to try to spot a W-bottom pattern.
And the first one that I can spot is right here. Let me just thicken this chart for you as I always do because I like to have my charts visually attractive. Now, you can see that the first W-bottom pattern comes when this entire move starts to pause [SP]. And then we come to this low, right here, and then buyers push price up and then we make a higher low meaning that the second attempt to break with this low was not hard enough. So we have what seems to be a 28-pip W-bottom pattern. And, if you want, actually once you see the pattern, it looks like you can see that we have first of all, let me just put this on a black and very thick lines so you can see it.
We have the first wave of the W-bottom pattern right here. You can see that this is the actual move to the down side from this high. Then we have the second wave of the W-bottom pattern right here. And then we have the breakout when we break with this neckline. Now like we said before, this is not a countertrend trading strategy, but more of a fade strategy so we are just going to get 20 pips out of this move and as you can see, the very top of this candle gives us a 20-pip profit on a W-bottom pattern. And of course, if you are going to be trading this, you have to put your stops below this low. Which means that you are going to have what seems to be a nice 24-pip stop-loss on the W-bottom pattern. And remember that you are going to place your stops below the second wave of the W-pattern, because if price comes back and breaks with the second wave of the W-pattern, you have to get out immediately because the formation would now be invalid.
And it’s very, very interesting to see that, you can see that, after the breakout price comes back and we have this huge candle that attempts to run with the stops of the traders that are playing this pattern. That’s why we are going to place our stops a few pips below the actual second swing of the pattern for us to be able to avoid these stop runs. This is basically what you are going to do whenever you have a W-bottom or a W-top pattern, you are going to calculate the height of the pattern. You are going to wait for the pattern to complete and to break and of course, you need the pattern to be formed at a very crucial level. And I didn’t show you which levels of support we were talking about before, because I wanted to show you that this pattern works.
Okay, now I am going to show you the actual levels that we were working from. And I’m going to use a horizontal line just to put a visual representation of the actual level of support and you can see that the W-pattern is working right at a strong level of support. And you can see that after we fade the move for 28-pips, price tried again to break it and finally did break it to the downside.
So this is how you are going to be trading these patterns and you need to spot them. And of course if you are in an up move, you are going to do the same, but with the M-top.