By Mike Wilt
Rob suggested that I write a piece for his blog on the M (short setup) and W (long setup) formations. These are nothing other than ABC formations however they are easy to see once they are formed and exciting to watch as they materialize and you make money off them.
Below is a M formation from today’s trading. This was a classic formation since the right apex of the M was lower than the left apex. This suggests there was insufficient buying to even reach the previous peak and resulted in a nice down move. I generally only take these trades with the trend but this formation has a good probability of success so I may take one countertrend. I will consider the formation as long as the right side of the formation hasn’t seriously violated the level of the left side. This particular trade also had the benefit of trading away from the trendline which is another strong element of the setup (trading away from S&R).
The W formation (buy) is just the opposite of the sell. You prefer the right side of the formation to be higher than the left. I prefer not to trade countertrend or into S&R but if there is enough room, the S&R should be a profit target. The chart below shows four formations. Notice how the trendline tended to limit the profit potential of the 3 countertrend trades (red) while the yellow formation, with the trend, had much more potential.
There are no rules for when these formations start; it is all in the eye of the beholder. Also a M can morph easily into a W so the formations can become fluid. The central meaning is that there is either insufficient buying so prices fall (M) or insufficient selling (W) so prices rise. This is an important dynamic and these formations help you see that and since they form over a reasonable period of time, they keep you from front running the signal. For entry, I wait until the apex on the right side appears to be in place and you can take an entry using the room’s rules or your own. Trade management is nothing unique either. Again, if trading into S&R, please respect them and use them as profit targets.
So here is to continued good trading in the OIL TRADING ROOM.