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A pair of bullish 'W' Reversals

CMC Markets

One of the more interesting ways to look for trade setups is to see how the price volatility has been changing over time. Common ways in which traders do this is by looking at indicators such as the average true range and the Bollinger Bands. In this case we are looking at the latter of the two. The 'W' reversal (and its sibling the 'M' reversal) are spotted by looking for a reasonably strong trending movement that forms a trough outside of the bands (i.e. more than 2 standard deviations away from the moving average) and

then form a subsequent one within the bands. One of the important criteria is that the peak between the 2 troughs does not cross over the moving average within the bands. Once the trough has been formed this then represents a long signal with the stop being placed below the second trough. The trader may look for additional confirmation with an oscillator (say the stochastic oscillator in this case) preferably being in oversold territory. The trader may also look to a higher timeframe such as weekly charts to ensure the oscillator is not in overbought territory.

All the best,

Dave.


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