The Wolfe Wave trading system is actually a bit similar to the Elliot waves, but with some subtle differences. The Wolfe Waves simply simulate the natural rhythm of price movement that is found in the forex market and indeed in all financial markets. As you probably know by now, the price movements in the market do not move in a straight line, but rather occur in waves as a the varying supply and demand dynamics that are operational in the market force the price action to move up and down like the waves of an ocean, even when the price action is ultimately heading in an upward, downward or horizontal direction.
Wolfe Waves occur in a 1,2,3,4,5 orientation, and the arrangements of these points will depend on if the market is in a bullish orientation or a bearish orientation.
The arrangement of these wave areas are shown below for bullish and bearish markets:. From the chart displays above, we can clearly see that the wave patterns in the Wolfe Wave formations can be used not just to define the trend in the market with the accompanying retracements and continuation sequences, but also the areas where the price action forms major or minor support and resistance areas.
How Wolfe Waves Are Used in Technical Analysis Five waves make up the typical wave formation pattern seen in the Wolfe Wave. We have the following waves: The counting sequence for the Wolfe wave is indicated in this example taken from the bullish Wolfe wave.
The sequence for the bearish Wolfe wave can be deduced by simply taking the opposing side of the sequence seen in the bullish wave. Point 2 represents the top of the wave, and this is essentially the highest part of a Bullish Wolfe wave. In a bearish Wolfe wave, this point would be the bottom of the wave and represent the lowest part of the wave pattern.
Point 1 is the starting point of the wave, and represents the bottom of the wave prior to the emergence of the wave sequence. In a bearish Wolfe wave, it would be the starting point representing the top of the pattern prior to the emergence of the wave sequence.
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Point 3 is the bottom formed by a price decline from point 2. In a bearish Wolfe wave, it would be a top formed from price ascension from point 2.
It is usually lower than point 1 in a bullish Wolfe wave, but higher than point 1 in the bearish Wolfe wave. Point 4 represents the topmost part of the price rally from point 3, or the top of the wave sequence, but it is located at a lower horizontal level than point 2. In a bearish Wolfe wave, it is the bottom of a wave sequence and is usually higher than point 2.
Point 5 extends lower from point 4 in a bullish Wolfe wave, and usually is the extension of a trend line that is drawn from points 1 to 3. In the bearish version of the Wolfe wave, we see point 5 extending upwards from point 4, completing the trend line drawn from point 1 to 3. So we see clearly that Wolfe waves tend to occur symmetrically at intervals, with the bullish Wolfe wave containing two areas of price advance, 2 areas of retracement and then a bullish breakout of the trendline.
The bearish Wolfe wave has two areas of price decline followed sequentially by 2 areas of price advance and then a downside break of the trend line. Trading with the Wolfe Waves In trading with the Wolfe pattern, we will be introduced to the concept of the EPA expected price at arrival of price action from point 5 and the ETA the expected time of arrival of price action from point 1 to 3 to 5 to a vertical level corresponding to EPA.
Notice that the and price waves are nearly symmetrical, as are the and price waves. The move from point 5 is expected to break the trendline to arrive at a point known as the EPA, which can be used as the take profit point of any trade taken from point 5. The key components in setting up the trades with the Wolfe wave patterns are as follows: The point of balance usually corresponds to point 3 if the market is located at point 5.
If you can look at this picture of a seesaw with two different weights at both ends of the device, where would the balance of the market swing? It would surely swing downwards as the heavier weight would pull the seesaw down. That is how it is in the forex markets. There are also two kinds of weights in operation in the market: When demand exceeds supply, the price of the currency goes up. When supply exceeds demand as we see in the picture where the 20kg weight represents supply , prices will fall.
So whenever we are confronted with a market situation where a Wolfe wave can be drawn and the market is seen to be at point 5, then you can be sure that the trade will go in the opposing direction from point 5 to the EPA. The EPA can actually be deduced because it is on the same vertical plane with the ETA. The key factor however, is being able to determine the point of balance, and the point at which the price action is at point 5.
Determining the Points of Balance and Point of Trade Entry Like we said earlier, the point of balance is situated at point 3. The point of balance can only be determined when the full 1,2,3,4,5 Wolfe wave pattern has formed. When this happens, then the way to go is to first see if points 1,3,5 can be connected with a trend line in the proper orientation.
This trend line should be sloping downward in a bullish Wolfe wave pattern and sloping upwards in a bearish Wolfe wave pattern. Sometimes the angle of slope may be very minimal. Once this trend line can connect points 1,3 and 5, draw another trend line to connect points 3 and 4.
This trend line should be extended to meet the trend line to meet at a point of intersection known as the ETA. The next step is to connect the individual points to see if and will have symmetry, and also check to see that and have symmetry.
Please note that perfect symmetry cannot be achieved; the best the trader can hope for are lines that are almost symmetrical. On the chart, extend a theoretical line from point 5 to another point which is expected to be the expected price at arrival or EPA.
The EPA should be in almost the same vertical plane as the EPA. The line connecting point 5 to the EPA is the price action that is expected to follow. The trade entry should be made at point 5, with the EPA as the profit target while the stop loss should be placed beyond the trend line that connects points 1, 3, 5.
The chart below says it all: Parameters for the trade are: In order to profit heavily from this trade setup, you must be in the correct price direction and you also must time the trades correctly. This is what the Wolfe wave patterns are programmed to do. Most people would get deceived especially if the price action gaps from point 4 to 5 and they would think that the market is to continue in the same direction.
Wolfe Wave Trading System| Learn To Trade Wolfe Waves
But a discerning trader who uses the Wolfe waves for analysis of the trade would be able to see a trade moving in the opposite direction from point 5 to the EPA.
Conclusion There is no limit to what can be achieved with the Wolfe wave patterns. The issue is always to be able to identify and correctly trace the pattern. For those who are looking for the automated way of tracing this pattern, Autochartist comes to the rescue.
However, my experience with this tool shows that some of the 1,2,3,4,5 patterns are not properly traced by this tool. I would therefore advise that the trader trains himself or herself to fully understand how to identify and trace the Wolfe wave pattern, as well understand how to detect the point of balance point 3 and the point of trade entry point 5 as well as the point of trade exit EPA.
Dankra is a forex trader who has played the markets for 7 years. He also trades binary options and spends his free time developing strategies that traders can use to beat the markets. He also codes indicators and EAs for the MT4 platform. Home Forex Analysis Technical Analysis Fundamental Analysis Forex Research Fractal Analysis.
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Bulkowski's Bullish Wolfe Wave
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The arrangement of these wave areas are shown below for bullish and bearish markets: Bullish Wolfe Wave Bearish Wolfe Wave From the chart displays above, we can clearly see that the wave patterns in the Wolfe Wave formations can be used not just to define the trend in the market with the accompanying retracements and continuation sequences, but also the areas where the price action forms major or minor support and resistance areas.
Take a look at the bullish Wolfe wave chart below: Dankra Dankra is a forex trader who has played the markets for 7 years. March 19, , September 18, , July 1, , 8: June 1, , BST 9 Interview with Denis Mysenko of Forex4you. August 23, , 7: BST 8 An Introduction to using Elliot Waves in Forex Trading. July 16, , BST 8 Tips on using Pivot Points to trade Forex.
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