The Anatomy of a W: Predicting Price Action
If you’ve been around TRi for any time, you’ve likely heard about M’s and W’s. Brian often talks about these price patterns, and you’ll see them show up everywhere. They appear all over the charts, in candlestick fractals, indicators, and larger price pattern structures like Wykoff accumulation and distribution.
But why do W’s and M’s work so well to predict price action?
This post will answer that question and break down the anatomy of a W, with the infographic as a visual bonus to help you see the process. This works the same for an M as for a W, except everything is in reverse.
Step 1: The market has a strong down move
The initial step is a down move in the market, showing that the sellers are increasing and supply is overwhelming demand. Trying to trade here is like “catching a falling knife.” You may get lucky and get a good trade, but likely, you will get cut (stopped out).
At this step, start hunting for divergences in momentum indicators. You may see that the market is moving down, but the MacD or RSI is making higher lows and moving up. This is your warning sign that this down move is not as strong as it looks.
Step 2: Buyers Step Up
At this level, buyers have now stepped up to defend the price. Momentum was in the buyers’ favor, and the price now moved up. Demand overwhelms supply at this price point, so the price has no place to go except up. You might see divergences confirm and volume entering the market.
Step 3: Don’t Chase Midpoints
At the midpoint of the W, the price looks very strong. However, sellers defend this level and overwhelm the buyers, forcing the price down. Supply has once again overcome demand, and the price has to decrease. When the market moves up and down like this, it’s important to remember not to chase. The market likes to retrace, so don’t chase and instead draw reload zones.
Step 4: The Second Leg Retrace
At step 4, the buyers step up to protect the previous level at step 2, putting in the first higher low of the W. This leg of the W is often in a reload zone between Steps 2-3. Since the demand here is higher, it overwhelms supply, and the price has no choice but to move up. Sharpshooter traders may take shots at the bottom end of this range, hunting lower time frame trades, candle patterns, or market structure.
Step 5: The Breakout
Waiting for this part of the W is crucial since W’s often don’t break out and instead turn into M’s. You can give yourself an edge with this price pattern by waiting for that breakout confirmation. At this level, buyers are so strong that they can break through the sellers’ resistance at step 3. Demand overwhelms supply again, forcing the price to break out, forming the W. Don’t chase the price here again, as prices often retrace and give you a good entry.
Step 6: The Check
The selling pressure from step 1 has now cleared, and the market has decided it wants to move higher. As price explores this new range, it often tests the step 3 level from the other side, turning previous resistance into support. We often refer to this as a Wykoff check and shows a confirmed change in the trend.
Entering The Trade:
There are many ways to enter a trade using this price structure. You could try to front-run the pattern after seeing confirmed divergences at step 2 and draw reload zones between steps 2-3 to enter. Maybe you hunt for small candle patterns within the reload zone and use those patterns to frame your trade. Many traders wait for a breakout and then buy the retest of the W, meaning your risk window will be larger, so you must adjust your position size and never risk more than 5% on any single idea.
You should place your stop below the step 2 position because if that level breaks, then your W thesis was incorrect, and the market is telling you that buyers who stepped up at that level could not hold it, and the market wants to explore lower.
Exiting The Trade
Your aim as a trader is to make money, and the best way to do that is to make sure each trade you take has a minimum 2:1 risk-reward ratio. This way even if you're wrong a third of the time, you can still break even as a trader. The goal however is to make a profit, so your trading plan should aim for a 60%+ win rate.
Increase the Risk:Reward ratio by trading individual candle patterns within the larger market structure, and remember the number 1 rule at TRi, never risk more than 5% on any single idea.
Learning "The Process"
Download the accompanying infographic as a reminder of this process, and start paper trading to test out this market structure pattern on any time frame in any chart. If you want to learn "The Process" in more detail, the TRi Level 1 Program is the place to go.
This post is inspired by the TRi Level 1 Program and is just a tiny part of the full 12-week course that covers capital market theory, fundamental analysis, technical analysis, building a trading plan, and starting a profitable trading business.
For more info on the course, head to therationalinvestor.com/learn, and if you’d like a 30-day free trial to see what TRi is all about, check out join.therationalinvestor.com/trial.
The Anatomy of a W Infographic
Download the full resolution infographic here