What is W Formation?

W formation is a chart pattern that occurs when the price of an asset first declines, then forms a bottom and rises again, and then experiences a retreat and rises again.

The W pattern, also known as the double bottom pattern, is a term frequently used in technical analysis and is often used to describe a specific pattern on price charts. This pattern often appears at the end of a downtrend and is thought by investors to signal a potential trend reversal.

W formation takes its name from the shape formed by the price movements on the chart. A W pattern features two low price points close together between two lows and a “W” shaped price movement connecting the two lows. After the first low price point, prices rise, then fall again, forming the second bottom, and eventually prices rise again, completing the formation.

The W pattern marks a period that is generally considered a “trend reversal”. That is, prices may begin to break out of the previous downtrend and move into an uptrend. Therefore, when a W pattern is seen, traders are often looking for a signal that prices will rise and a new uptrend may begin.

Technical analysis tools such as the W pattern can help traders understand price movements and predict future price movements, but should not be used alone and should be evaluated in conjunction with other analysis tools, indicators and market indicators.

How is W Formation Formed?
The W pattern refers to a specific pattern on the price chart and usually occurs at the end of a downtrend, complete with the formation of a “W” shape on the chart. This pattern is considered a signal that the price trend will change and is taken into consideration by investors.

Downtrend: First, a downtrend is observed on the chart. Prices usually tend to decline continuously over a period of time.

First Bottom: Towards the end of a downtrend, prices reach a bottom. This bottom is the lowest point of the downtrend. The first bottom is usually at a price level close to a certain support level.

Rising: After the initial bottom, prices rise slightly. However, this does not indicate a complete reversal of the uptrend, most of the time it is a corrective move.

Second Bottom: Prices then begin to fall again, creating a second bottom. This second bottom is usually found at a price level close to the first bottom.

Uptrend: After the second bottom, prices usually begin to rise strongly. This rise marks the completion of the W formation and can be interpreted as a sign that an uptrend has begun.

What are the Features of W Formation?
Two Low Points: In the W pattern, prices first form a bottom with a decline, followed by a reaction rise, and then a decline again to form a second bottom. These two bottoms are usually located close to each other or at the same levels.

Neckline: In the W formation, a "neckline" is created by combining the peaks corresponding to the two bottoms. The neckline is usually a horizontal line or can be sloping upwards with a slight slope.

Volume: Volume also plays an important role in the W formation. Volume is usually high when the first bottom forms, but volume usually remains low or at a falling level as the second bottom forms. This may indicate that the force supporting the second bottom is weaker than the first bottom.

Reversal Signal: When the W formation is completed, prices begin to rise by breaking the neckline upwards. A break above this neckline is considered a trend reversal signal and investors often begin taking buy positions.

Target Level: After the completion of the W formation, an upward movement begins from the level where prices broke the neckline. The size of this movement can often be as much as the distance between two bottoms. This distance is often used to determine the target uptrend level of the formation.

Advantages and Disadvantages of W Formation

Advantages,

Signals Trend Reversals: The W pattern usually appears at the end of a downtrend and potentially signals that an uptrend may begin. Therefore, traders can use the W pattern to predict trend reversals.

Presents a Clear Shape: The W pattern creates a clear shape on the price chart and usually appears as a W shape between two bottoms. Therefore, the pattern is usually easy to identify and interpret.

Risk Management Opportunity: Since the W formation signals a potential trend reversal to investors, it enables risk management when making buying and selling decisions. Traders can set stop-loss levels and limit potential losses when they see the pattern forming.

Disadvantages,

May Give Wrong Signals: W formation, like any technical analysis tool, may give wrong signals. Even when the formation is complete, prices may not move in the desired direction or the trend reversal may be weaker than expected.

Subjective Interpretations: Correct identification and interpretation of the W formation can sometimes be subjective. Determining the bottom points on the price chart and evaluating whether the formation is completed is a subject on which investors may have different interpretations.

It Is Insufficient Alone: When used alone, the W pattern should be evaluated together with other market indicators and analysis tools. The formation of the formation should be supported by other factors such as the general condition of the market and transaction volume.

What Happens After W Formation?
The W pattern usually signals the end of a downtrend and the beginning of an uptrend. Once this formation is completed, prices usually begin an upward movement and a trend change occurs.

The upward trend that emerges after the completion of the W formation is confirmed when prices break the line connecting the bottom points where the formation was formed. This breakout indicates that purchasing demand is increasing and the uptrend is strengthening. After this point, prices generally continue the uptrend and move towards the target uptrend levels of the formation.