By Greg Capra, Pristine Trading
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The W-bottom pattern is a retest of a prior pivot low and reversal. Many traders understand this concept.
Few, however, really understand that there are many variables that can have a significant impact on the success or failure of the pattern. In this lesson we are going to review the different ways or places a W-bottom can form.
The W-bottom is a pattern which typically results in a move higher, but the location where the pattern forms and/or what preceded it is a key piece of information that must be added. This information will greatly increase the reliability of the setup.
At Pristine, we teach students multiple technical concepts for trading and investing. These concepts individually are excellent tools; however, it’s the combination of these technical trading concepts in an organized method that creates excellent, high-odds opportunities. Here are some of the ways we teach using the W-bottom.
● A W-bottom within a downtrend and no price support to the left of current prices
● A W-bottom in a shorter time frame with the longer
● having formed a Climactic Buy Setup (CBS)
● A W-bottom after a strong momentum move higher
● A W-bottom after Major Support (MS) has been broken
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Keep in mind; all Pristine concepts are universal to all tradable instruments (Stocks, Futures, Forex, etc.) and time frames. Of course, a basic understanding these topics is vitally important to successful trading and investing, however, there is no ‘right or wrong’ answer when it comes to what instrument or time frame you should trade. It’s simply a choice.
Let’s review each of the above bullet points with a chart example. In each example I have excluded the price and time axis. The reason for this is the focus should be on the concept, not a specific time frame or price.
A W-bottom within a downtrend and no price support to the left of current prices
The first point to understand is that a W-bottom creates new support. In the chart above buyers have stepped up and stopped price from dropping further but there is no support to the left. As price moves up a pivot low (sometimes called a swing low) is established. Momentum then slows. Price turns back down and continues to fall as traders anticipate new lows. As the prior low is retested, there is always the potential for a W-bottom to form. While new support has been created and the possibility of prices moving to the upside has increased, the above scenario of the W-bottom is the least reliable because there is no support to the left. In other words, there is no compelling reason for traders to believe the prior downtrend is over.
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A W-bottom in a shorter time frame with the longer having formed a Climactic Buy Setup (CBS)
In the above scenario, prices have been falling candle-after-candle like the proverbial falling knife and are now at or near an area of Major Support (MS). With MS to the left we know that buyers are going to show up and try to take control from the sellers. It’s now time to drop down to a lower time frame in anticipation of the W-bottom forming. Some of you may be thinking; why would I buy when prices are in a downtrend, even if they are retesting a prior pivot low? The reason is that downtrends or what we refer to as a Stage 4 in the life cycle of price action often bottoms and transition into a sideways, Stage 1 (within the cycle) after reaching MS on a climactic drop. With this scenario, the W-bottom setup is an excellent trading opportunity.
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A W-bottom after a strong momentum move higher
In this scenario, price has moved up with strong momentum. When this happens, there is little to no price support below. There is now, what we call, a Pristine Price Void (PPV) below. Without price support to buy at on the pullback, there is no clear reference point to place a bid. Without price support, the odds of a price wiggle or shake out before a continued move up is likely. In this scenario, the W-bottom will be the setup to enter on. In the example shown price made a slightly higher low, but it is not uncommon for the right side of the W to make a lower low than the first pivot low. If this happens it is okay and often preferred because it can make for an even higher odds setup due to the shock effect on the earlier buyers’ stops being taking out.
Pristine Tip: Price patterns are a reflection of other traders’ prior actions, beliefs and likely future actions.
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A W-bottom when Major Support has been broken
When Major Support has been broken in an uptrend that uptrend has been violated. In other words, the uptrend no longer exists. The series of higher highs and higher lows being broken, and price moving under MS now suggests a move lower to the next level of price support. As we know, what is suggested on the chart does not always happen (that is why the Pristine Method provides an objective approach meant to keep you in the moment of now!). So, with price having moved under MS and the next level of support lower, our initial thought is that price should fall to that lower support area. However, as we continue to watch what is taking place, we notice a W-bottom forming. This suggests that price is not going to move to that lower level. Rather, it is telling us that buyers have taken control, created new support and are going to attempt a move to the old highs, and very possibly beyond those old highs. The reason we should consider an area beyond those old highs is because a move below MS in the time frame being viewed does not necessarily violate the uptrend in the higher time-frame. For example, MS can be violated in the daily time-frame and the uptrend broken, but the weekly uptrend still is intact. Under this scenario, price often will move to new highs within that trend.
As with all price patterns, the understanding of candlestick analysis from a Pristine point of view is essential. The use of Bar-by-Bar analysis as well as the addition of other Pristine concepts will increase the accuracy of your trading or investing decisions.
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ABOUT THE AUTHOR
Greg Capra is President and CEO of Pristine Trading, a leading online educational service for active, self-directed traders since 1994. He has been a day and swing trader and won the Moneyshow Live Trading Challenge six times in a row.
While the trading tools were crude in his early years of trading, Greg noticed that certain patterns would continually repeat themselves on a daily, weekly, monthly and yearly basis. Greg identified these patterns and then dove into why these candlestick patterns would form and how to best profit from them. He discovered how to understand the human emotion contained within every candlestick formation; and soon, without the help of any unnecessary trading indicators, the world-renowned Pristine Method was formed. For more than 20 years Greg has made it his mission to win in the markets and has helped thousands of individual traders just like you achieve their goals of financial freedom and attain the lifestyle that comes with that freedom.
Greg Capra and Pristine have been featured on CNBC, Barron’s, Investors’ Business Daily, International Business Times, MSN Money and other financial media. People all over the world have been taught how to successfully use these winning concepts in their every day trading and investing careers.
After several years of teaching the foundation material that traders still learn today in Trading the Pristine Method® (TPM) Mr. Capra took the Pristine Method® to a higher level and created Advanced Technical Strategies (ATS). ATS elevates students to a more comprehensive and deeper understanding of how to use the tools and tactics learned in TPM. He is co-editor of Pristine’s flagship product, “The Pristine Swing Trader.”, editor of Pristine’s Chart of the Week used by thousands of self-directed traders, author of his DVD seminar series, developed the Pristine Advanced Trading Lab. Greg has also authored “Trading Tools and Tactics, Reading the Mind of the Market”, and co-authored, “Tools and Tactics for the Master Day Trader”.