M and W Patterns in Trading - a Guide for Traders
By Stelian Olar, Updated on: Nov 29 2023.
If you've ever felt confused when hearing about double tops and double bottom or wondered, "What is M pattern in trading?" - you're not alone. Trading strategies using chart patterns can feel overwhelming at first.
The good news is that W pattern trading and M pattern trading are relatively straightforward to spot. I'll walk you through what they look like on charts and how to interpret them whether you trade stocks, Forex, or cryptocurrencies, these bottom formations appear frequently across all financial markets.
These patterns, aptly named the W pattern and M stock pattern, are classic chart formations that technical traders watch for.
By the end of this article, you'll understand how to identify w pattern in stocks and M chart pattern and incorporate them into your own trading strategy. Who knows, maybe you'll spot these patterns setting up on your charts and feel confident enough to trade them.
Learning to analyze chart patterns takes time and practice but armed with the right knowledge, identifying key support and resistance levels becomes much easier.
So let's dive in and unlock the secrets of the top W and M stock chart!
What Is W Pattern in Trading
The W chart pattern is a reversal chart pattern that signals a potential change from a bearish trend to a bullish trend. It is formed by drawing two downward legs followed by an upward move that retraces a significant portion of the prior decline.
This pattern gets its name because it looks like a "W" when viewed on a chart. The two downward moves form the first two strokes of the W, while the upward bounce forms the center stroke.
A W stock pattern contains four main price points to watch:
- The first low point after an “elongated” price decline
- The lower low point where the second leg bottoms out
- The peak of the bounce back up
- The support level of where the W pattern stocks began forming during the bearish trend
When the stock W pattern completes, it illustrates that buyers have become active again and suggests the prior downtrend may be over. The pattern forms a double bottom which is a powerful reversal signal in technical analysis.
Traders will watch for W pattern in Forex at the end of a bearish trend to signal an opportunity to buy. The completion of the W pattern confirms key support and is considered a bullish entry point by technicians.
Now that you know what is W pattern in trading, let’s see how to identify one.
How to Identify the W Pattern
The first thing you want to look for is a stock in a bearish trend that has fallen substantially from its high. Then watch for the following to occur on a W stock chart:
- The price drops and forms the first low of the W (the left downstroke).
- This is followed by a slight retracement higher.
- Then the w pattern stock declines again to form the second low (the right downstroke). This second low is below the first low point.
- At the second low, the sellers are exhausted and the direction changes back up.
- When the bounce back up retraces a significant portion of the prior decline, it forms the central peak of the w trading pattern.
- For a valid W, the center peak will be below the beginning of the pattern (the left peak). This forms the characteristic "W" shape on the W stock chart.
Once the W shape is complete, technical analysts will draw a "neckline" through the highest point between the two lows. The W bottom pattern signals a long position when the price breaks above the neckline at the end of the w trading pattern.
What Is M Pattern in Trading
The M pattern is another classic reversal formation that signals a potential change from a bullish to a bearish trend. It is the inverse of the W pattern.
The M trading pattern forms when the price makes two upward moves, followed by a downward correction that retraces a significant portion of the prior rise. This creates the shape of an "M" on the M pattern chart.
The four main points of the M shape stock pattern are:
- The first peak after a sustained rally
- The higher high point where the second leg tops out
- The lowest valley of the pullback down between the two rises
- The resistance level where the M shape trading pattern began
The M illustrates that sellers have regained control and the prior uptrend may be over. It forms a double top reversal pattern, which is bearish in technical analysis.
Traders watch for M patterns at the end of bullish trends in the stock market. The completion of the M pattern in stock market signals an opportunity to sell or open a short position when the price movements break below the neckline. Breaking below the M pattern neckline confirms the key resistance zone.
How to Identify the M Pattern
Now that you know the M pattern trading meaning, let's review how to spot the M pattern taking shape on a chart:
- Look for a stock in an uptrend that has risen substantially from its low.
- The price then advances further to form the first high of the M shape (the left peak).
- This is followed by a minor pullback down.
- The stock rallies again to form the second higher high (the right peak). This creates the big M pattern.
- At the second peak, the buyers are exhausted and the price reverses down.
- When the downward correction retraces a significant portion of the advance, it completes the valley of the M formation.
Monitoring how far the price drops from the neckline provides the M pattern target for closing out the trade profitably.
Double Top, Double Bottom, W and M Patterns - Know the Difference
Double tops, double bottoms, W patterns, and M patterns are some of the most common chart patterns used in technical analysis of stocks and other securities. Though they may look similar at first glance, there are important differences between these patterns that traders need to understand.
Double Tops vs M Patterns:
- Double tops form when a price hits resistance twice at the same level, creating two peaks. M patterns have three peaks, with the middle peak below the other two.
- Double tops signal a potential reversal of an uptrend. M patterns also hint at a trend reversal, but from a rise-retreat-rise sequence.
- The double top pattern requires a break of support for confirmation while M patterns want to see a break below the lowest valley for confirmation.
Double Bottoms vs W Patterns:
- Double bottoms form when a price hits support twice, making two troughs. W patterns have three troughs, with the middle one above the other two.
- Double bottoms indicate a possible reversal of a downtrend. W patterns also suggest a reversal, but from a fall-recovery-fall sequence.
- Double bottoms want to see resistance break for confirmation. W trend pattern looks for a break above the highest price level between the two bottoms as confirmation.
M/W Patterns vs Head & Shoulders:
- Visually trading M and W patterns looks similarly to the head and shoulders pattern.
- Head and shoulders tops have three peaks, with the middle peak highest. Inverse head and shoulders have three troughs, with the middle lowest.
- M/W patterns only have two peaks/troughs, but their middle point is opposite the head and shoulders middle point.
- Both M/W and head and shoulders patterns signal potential trend reversals. But M and W formation trading use rise/fall sequences, while head and shoulders climax with the middle point.
- The W pattern stock can be viewed as an inverted M pattern and similarly the M pattern trading bullish signal can be viewed as a reverse W pattern.
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