Trading the W model, or double bottom, can be very profitable and give you a definable area to risk from. It is one of the most highly recognizable chart patterns in stock trading. After all, who doesn’t know what a “W” looks like?
WHAT IS A W/ DOUBLE BOTTOM MODEL?
The W model is a consolidation model in which a stock essentially tests a support area twice. So the name “double bottom” is associated with the model. Usually, you will find this pattern as a pause in an uptrend or as a background pattern in a downtrend.
The double fund signals to potential traders that the stock is having a hard time making new lows. As a result, long-time traders can take advantage of the opportunity by buying the shares and risking the backing of the “W”.
It’s also fair to mention that if you’re familiar with the top-double part model, this is essentially the mirror image of that strategy.
HOW TO READ A MODEL W – LOWER DOUBLE CHART TEMPLATE
There are many different schools of thought on how to read a double bottom, but we think it’s best not to think about it too much. Some educators like to see the second dive of the “W” slightly below the first dive. Others may not require it. At the end of the day, what you are looking for is a support area to form, whether the second dive is lower or not.
Ideally, you want to see the volume spike as the W model is based along the model’s two “drinking troughs.” What this tells us is that weak hands are selling here, while stronger hands are absorbing their shares and supporting stocks. This will likely lead to higher volume along the lows.
As the second downstream of the double bottom is formed, it should be immediately on your radar. You could also seek long-term support from any previous loud bar from previous high-volume days. These are often footprints of larger position holders who may decide to support their position here.
Bullish W Model Trading / Dual Bottom Chart Model
For obvious reasons, the double bottom is considered a bullish chart pattern. However, there are never 100% certainties in the markets. And that’s why it’s always better to implement stops and stick to them!
Once you’ve entered the stock, make sure your trading plan includes a proper stop. In this case, we put our stop below the most recent point W. Then, we measure the depth of the W and apply it to our breakout entry to achieve a potential goal.
In this example, we reached our goal of $12. A $0.30 correction gave us a profit of $0.30, with only $0.13 in risk from our entry. Not bad!
Bearish/Dual Bottom W Chart Model
There’s really no double bearish bottom, per se. There is only one failed doubled fund. Unless, of course, you want to play the bearish counterpart to the double bottom model, which is the double top.
On the other hand, if you’re looking for a topping model, the double top is a great strategy to add to your arsenal. Just like the double bottom, a double bearish topping model fails after a new treble test. Ideally, you’ll take the short trade when the signal line breaks, setting your stop to the top at the top No. 2.
This is another example of PLTR. As stocks run, it is clear that selling pressure is present given the number of wicks on candlesticks. After the first sign of weakness, PLTR makes a failed attempt to set new highs in the Top 2. This traps breakout buyers and then the offer is withdrawn. The path of least resistance is obviously downward from then on.
Like our double-bottom model, we would initiate a position on the break of the red signal line, fix our stop at the highs, and measure the move for a potential target zone.