Have no fear; a Wolfe wave is not the same thing as the beast.
Wolfe Waves result from the interplay between supply and demand in the market. It may last only a few seconds or span many weeks or months, making it adaptable. Profits might be made every day with this pattern.
The pattern is named for Bill Wolfe, an S&P500 specialist trader credited with developing the Wolfe Wave trading technique and the corresponding indicator.
First, we’ll talk about what makes up a Wolfe wave.
Take a look at the diagram down below as an example first;
A Wolfe Wave pattern, as seen above, comprises five waves, the second and fourth of which are retracement waves.
These guidelines may be used to recognize this pattern:
For waves 3 and 4 to ride safely on waves 1 and 2, they must remain inside that shaped channel.
Waves 1&2 are equivalent to Waves 3&4 and (they are symmetrical).
Between Waves 1 and 2, we find Wave 4.
Each and every wave has a predetermined gap in between.
The entrance point is when Wave 5 rises over the trendline established by Waves 1 and 3.
Other features to know about the pattern are the EPA and ETA:
The EPA line is the first and foremost priority.
Price Approximation on Arrival, or EPA for short. It predicts how much the price will change in the far future. Therefore, the EPA line represents the point at which profits may be taken.
Without respect to the direction of the Wolfe wave, an EPA line is always drawn between points 1 and 4, as seen in the diagram.
Okay, let’s speak about the expected time of arrival (ETA) queue.
This is not crucial in trading the pattern. Therefore, it is a line that shouldn’t bother you. No harm in learning the basics, right?
Those who have purchased airline tickets before will understand what this entails. ETOA is an abbreviation for “Estimated Time of Arrival.”
An estimated time of arrival (ETA) line is used in Wolfe wave trading to predict when the price will reach the intersection of the two trendlines.
Nonetheless, the EPA is the most crucial line, so remember that.
Wolfe wave is most often seen in these three environments:
- rising channels (look for bearish Wolfe wave)
- descending channels (look for bullish Wolfe wave)
- Consolidation in pricing occurs inside horizontal channels.
And now we get to the exciting part: riding the Wolfe wave to profitability.
How to make entries on the Wolfe wave
At this time, we have recognized the Wolfe pattern in the chart (wave 5). So what actually causes the buy or sell signal/entry?
Below is a chart for you.
The engulfing pattern that closed below the trendline in our GBPJPY 15-minute chart above served as the trigger for the sell entry. In this case, it is crucial to use a candlestick pattern in addition to the wave trigger zone for verification.
Here’s another one, this time from the hourly GOLD chart: a bullish Wolfe wave.
The previous chart shows that the inverted hammer on wave 5 served as entry confirmation.
How to Set Stop Loss on the Wolfe Wave
As we discussed before, you may reduce your risk tolerance by using a stop loss. As can be seen in the GBPJPY chart below, the Stop loss for the bearish pattern should be set immediately above wave 5 for optimal results when trading Wolfe waves.
Set your Stop Loss for the bullish Wolfe wave on Gold immediately below point 5, as illustrated. This is the lowest point of wave five thus far.
How to set Profit Targets o the Wolfe wave pattern
The pattern’s intended focus is along the EPA line. Without respect to the direction of the Wolfe wave, an EPA line is always drawn between points 1 and 4, as seen in the diagram.
Below is Wolfe’s negative analysis of the GBPJPY currency pair. When the price reaches the EPA line, as seen in the following figure, that is the point at which a profit may be expected.
It’s the same with the Bullish Wolfe wave on the hourly GOLD chart, as you can see below. Again, we join waves 1 and 2 with the EPA line. As indicated above, the sweet spot is when the EPA meets the price.
In conclusion, if you stick to the fundamentals, the Wolfe wave pattern may be quite profitable. The reward is consistently high to the risk involved. Moreover, the pattern is present throughout all time periods, which means it has the potential to provide profits every trading day.
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