What is the Wolfe Wave?
Simply put, the Wolfe Wave is a natural rhythm that exists in all markets. It is made up of waves of supply and demand that form their own equilibrium. It was not “invented” by me, but discovered. The key to its accuracy is in properly identifying the 1, 2, 3, 4 & 5 points. These are what give it its proper balance of equilibrium. It is very important to identify the dominant Wave. It is somewhat like recognizing those 3-D pictures. After a while a smile comes to your face and you say: “WOW, I see it.”
As practice shows, all these Wolfe wave indicators aren’t perfect, but can certainly be of some help, while manual trading remains the best option still.
Wolfe waves: quick introduction
Wolf waves belong to swing trading methods. It was developed by Bill Wolfe, who has made living trading S&P.
The general idea is based around finding channeling markets that are showing an imbalance and by counting waves and drawing trend lines spot perfect entries and project accurate profit targets.
Wolf wave pattern consists of 5 waves, which form a channel or an ascending/descending wedge in advancing/declining markets.
Wolf wave bearish and bullish patterns
How to count Wolfe waves – bullish setup
Wolfe wave is a reversal pattern, therefore it is important to know exactly how and where to look for it, otherwise a trader risks being on the wrong side and trading against the trend that isn’t over yet.
– point 2 is a top.
– point 1 is the bottom prior to point 2.
– point 3 is the bottom after point 2, point 3 must be lower than point 1.
– point 4 is the top of the rally after point 3. Point 4 must be higher than point 1.
– at this stage a trend line is drawn connecting point 1 and 3. An extension of this trend line will project the reversal which will come at point 5.
– Point 5 will most likely exceed the trend line drawn from 1 to 3. Point 5 is the entry point with a target at EPA (Estimated Price at Arrival) line.
– EPA line (the green line on the illustration) drawn from point 1 to 4 and is extended into the future.
Wolfe wave trading examples
Below are the 1H USDJPY chart with 2 Wolfe wave setups:
A clear simplified chart with already identified waves and lines.
A chart with Wolfe wave count as well as entry & profit targets.
Stops with Wolfe waves
The Stop is placed behind point 5.
If to draw a line from point 2 to point 4, then once price reaches that line, we can move the stop loss to break even level.
Wolfe wave trading requires training your eyes to spot setups. It may take awhile, but afterward it becomes easy to stop Wolfe wave patterns across all time frames: from 1 min charts to monthly charts.