Best Wolfe Wave Strategy – Alpha Wolf Trading
Best Wolfe Wave Strategy – Alpha Wolf Trading
The best Wolfe wave strategy is a trading strategy with a high-profit loss ratio above 90%. Wolfe waves were introduced by the veteran trader and market wizard Linda Raschke.
These types of patterns were originally discovered by Brian and Bill Wolfe who, after analyzing a considerable amount of data, realized major price changes frequently occur after four minor waves.
You can view the Wolfe Wave pattern similar to the Elliott Wave pattern but on steroids. But, to understand why Wolfe Wave is an advanced version of Elliott Wave, let’s first start with the Wolfe Wave definition.
See below:
What is Wolfe Wave Pattern?
The wolf wave is a naturally occurring trading pattern that can develop across all financial instruments. This chart pattern is made of five alternating waves. This is the same as the Elliott Waves. Supposedly, it highlights the supply and demand imbalances in the market and possible equilibrium price points.
The wolf waves can appear on all time frames from the 5-minute intraday chart up to the weekly chart. Unlike other chart patterns, the wolf waves are used to forecast where the price is going. And also how much time it will take to get there. Here is another strategy called weekly trading strategy that will keep you sane.
In essence, the wolf wave trading strategy is a great market timing tool.
As is the case with many types of “wave strategies,” Wolfe Wave traders are looking for specific patterns where the security is likely to experience a sudden change in value.
After the first four “waves” have been developed, traders will expect a new “breakout” to occur.
By drawing a line between the first and fourth points, Wolfe wave traders create a profit target line. This is done by projecting the line to the breakout point expected to occur after wave 5. The goal of this exercise is to find the estimated price at arrival (future value) and the estimated time of arrival (when this future value will occur).
Now …
In order for a Wolfe Wave strategy to work, it’s important to pay attention to a corresponding set of rules (listed below). These rules will help determine if the pattern is legitimate, or is a product of random price oscillations.
This will help you to successfully trade the best Wolfe wave strategy. You can also read our best short-term trading strategy.
Wolfe Wave Trading Strategy Rules
The Wolf Waves rules will help you to identify this symmetrical chart pattern. You can apply the same rules for the bullish and bearish wolf waves. Without further ado, these are the Wolfe wave’s characteristics:
- Wave 3 and Wave 4 must be contained within the channel created by Wave 1 and Wave 2.
- Wave 1 and 2 equals Waves 3 and 4 which should highlight a perfect symmetry.
- Wave 5 breaks above the trend line created by wave 1 and wave 3. Wave 5 is also used to trigger our entry.
- There is regular time between all waves. What we mean by this is that the time to complete one cycle from low to low (and from high to high) is the same. So, between 1-3-5, there are equal timing intervals between wave cycles.
Next…
Let’s see how to correctly draw a Wolfe Wave.
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How do I draw a Wolfe Wave?
In technical analysis, you can draw the Wolfe Wave pattern by drawing a price channel around the first 4 waves.
First, you need to draw a parallel trend line that connects wave one and three and a second parallel trend line that connects wave two and four. These parallel lines are extended into the future to gauge where wave five could end.
See the example below:
It’s not that difficult to spot and identify wolf wave patterns. Some trading platforms have the Wolfe wave indicator in their default tools, which makes your job even easier.
However, if your trading platform doesn’t come with the Wolfe wave indicator, you can use the channel indicator. This will help you better visualize the Wolfe wave pattern.
We’re going to lay down precise instructions on how to do it with only two mouse clicks.
The 5 alternating Wolfe waves form a perfect channel or an ascending/descending wedge. And sometimes even a flat channel. This channel will give you the price range within the market moves.
We can also use two trendlines that fan out from Wave 1 for entry and exit points.
See the chart below:
You could say that the Wolfe waves chart pattern is an advanced channelling pattern.
Wolfe Wave vs Falling Wedge Pattern
If we examine the technical chart of a Wolfe wave price pattern more carefully, what does it remind you of?
If you’re thinking about falling and rising wedges chart patterns then you’re correct. Theoretically, the bullish Wolfe wave is also a variation of the falling wedge pattern (see figure below).
Next…
Let’s see what are the pros and cons of the wolf wave pattern.
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Why you should Use Wolfe Wave
Wolfe Wave patterns can help traders have a better reading of the price action. However, more importantly, the wolf wave chart pattern is used for two things:
- To project short-term price swing reversals
- Timing the market with sniper trading entries
These two reasons are more than enough to hook you up with the Wolfe Wave pattern.
Now…
Let’s go ahead and see how do you trade Wolfe Waves.
See below:
How to trade the Wolfe Wave pattern
Now, the standard way to trade Wolfe Wave is to wait for the 5 wave price formation to complete. Although the basic Wolfe Wave entry rule is simple and reliable there are alternative methods that can help you have more trade entries.
Wolfe wave trading is all about price action staying within a price channel, right?
And, you only get an entry on the fifth wave after the price makes a false breakout.
For market technicians with more experience, these false breakouts are similar to the upthrust or “bull trap” – if we’re talking about a bearish Wolfe Wave. The opposite of an upthrust is the spring or “bear trap” – if we’re talking about a bullish Wolfe Wave.
The upthrust and spring are trading concepts used in Volume-Price Analysis.
See the chart example below:
Now…
The only drawback, if we can say so, with the standard Wolfe Wave entry is that:
You’ll probably have to wait for a few days and possibly a few weeks, depending on your time frame before the Wolfe Wave pattern is fully completed.
While we’re waiting for the Wolfe Wave pattern to develop we can pinpoint another entry at the end of wave 4.
Here is what I mean:
To identify the ending point of wave 4 we simply have to copy-paste the upper resistance trendline that connects wave 1 and wave 3 and attach it to the ending point of wave 2.
See the example below:
Now…
This can help us pinpoint a potential point where wave 4 might be ending based on the symmetry of wave 1 – 3 and wave 2 – 4.
Once you have the first candlestick touching this trendline, you can consider taking a position with a protective stop loss below the wave-2 low.
Let’s continue with our example and see how the price behaved:
See the chart below:
As we can tell, the price moved beyond the support trendline.
Now, there are different types of Wolfe Wave channels and most of the time you will not be able to find the same price angle between the upper and bottom lines. What we’re looking for here is to have harmony between the two lines.
As for the take profit strategy, the obvious place to close your position is when we break outside the Wolfe Wave channel.
One more thing:
If wave 4 penetrates the initial trendline that we copy-pasted, we need to adjust it to the actual wave 4 low. Of course, we can do that as soon as the swing low is set in place.
Here is the adjusted Wolfe Wave pattern:
Here is the thing:
After you secure the profits there is no time to celebrate because you need to get ready to re-enter the market once the price enters inside the channel.
Now, let’s move forward and see how to trade the Wolfe wave pattern and how you can make money without a Wolfe wave indicator.
Best Wolfe Wave Strategy – Bullish Wolfe Wave
For the purpose of this article, we’re going to trade the bullish Wolfe wave.
When trading the best Wolfe strategy you will find that after the entry was triggered your position should show you an immediate profit. This is because the reversal pattern that emerges from the Wolfe wave chart pattern is very violent.
Once we’ve got the first five waves we have the general setup of the wolf wave. After the last wave has broken below the range channel it’s time to get ready for some action.
So, here is a clear step by setup guide to conquering this out of the box chart pattern:
Step #1: Prior to the Bullish Wolfe Wave Formation look to have a clear Bearish Trend.
Firstly, before the first wave develops we need to have a clear trend that needs to be reversed. For high probability trades, we want to see a prior bearish trend before the bullish Wolfe wave develops.
This step is quite essential if you want to correctly trade the Wolfe pattern.
Now that we’ve identified a trend, it’s time to apply the Wolfe wave rules to the price chart. This brings us to the next step of our reversal strategy.
Step #2: Try finding a 5 wave move that can be contained in a channel. The last wave 5 must break below the channel.
You can find the Wolfe wave pattern rules a few paragraphs above.
A valid Wolfe wave is composed of 5 waves that follow some simple rules. However, the most important rules are that wave 2 and 4 must be contained within the channel created by Wave 1 and Wave 2.
Secondly, wave 5 breaks below the trendline created by wave 1 and wave 3.
Now, we’re going to lay down our entry strategy:
Step #3: Buy after we break and close inside the Price Channel.
At the moment when the price enters and closes back into the price channel, we want to enter a long position. We like to wait for the close inside in order to eliminate possible fake breakouts.
Note*: If we don’t get a close back into the price channel we don’t have a valid trade signal.
Another sign to look for is how quickly it goes back into the channel. We prefer to only trade the Wolfe patterns that retrace very quickly back into the range.
This is a sign that a smart money reversal is at work.
Remember, in trading, you only want to trade the high probability trade setups.
The EUR/USD bullish Wolfe wave presents this strong characteristic. We can note that right after wave 5 broke below the channel the very next day it reversed and closed back above the price channel.
The next logical thing we need to establish for the Wolfe Wave trading strategy is where to take profits.
See below…
Step #4: Draw a trendline that connects wave 1 low and wave 4 high and extend it in the future. Take profit when the EPA line is hit.
The line that connects wave 1 low and wave 4 high is called the Wolfe wave EPA line.
The EPA line stands for Estimated Price at Arrival and it’s an effective take profit strategy. The EPA line main purpose is to show at what price the market will extend after it reversed the previous trend.
Note*: If the EPA line is too steep, oftentimes it means that the price will never reach it. In this case, you want to take profits early.
The last thing we need to establish is where to place our protective stop loss.
See below…
Step #5: Hide Protective Stop Loss below Wave 5.
The protective stop loss can be located below the last wave or wave 5. This strategy gives us a very tight stop loss which is good for our risk management strategy.
Obviously, a break below wave 5 means we also break first below the channel and this will invalidate the validity of the Wolfe wave chart pattern.
Note** the above was an example of a BUY trade using the best Wolfe wave strategy. Use the same rules for a SELL trade. In the figure below, you can see an actual SELL trade example.
Wolfe Wave FAQ
Who invented Wolfe Wave?
The Wolfe Wave pattern was discovered by Bill Wolfe, a professional S&P500 trader and his son Brian Wolfe. Similarly to the Elliott Wave pattern Wolf Waves are naturally recurring patterns found across all time frames and different asset classes. Wolf Wave simply depicts the natural ebb and flow in the markets.
How do you get Wolfe waves?
To recognize the Wolfe Wave pattern, the price action needs to satisfy a series of criteria. First, the wave cycles must occur at consistent time intervals. Secondly, wave 3 and 4 needs to hold on within the channel limits created by wave 1 and 2.
What is a bearish wave?
The bearish Wolfe Wave is the inverse version of the bullish Wolfe Wave and naturally, it occurs during an uptrend. As the name suggests, the bearish wave signals a change from a rising market to a falling market.
How do you use the Wolfe Wave indicator?
Generally, the Wolfe wave pattern can be used to spot short-term bullish and bearish price reversals. Traders who use the Wolfe Wave strategy enter the market based on the two parallel lines drawn between wave 1 and 3 and wave 2 and 4.
What is bullish Wolfe Wave?
The bullish Wolfe Wave is a reversal trading pattern that naturally occurs during a downtrend. As the name implies, the bullish wave signals a change in the trend direction from bearish to bullish.
Conclusion – Best Wolfe Wave Strategy
The Wolfe wave strategy is a trading strategy built around waves the same as Elliott Wave trading. We use other trading concepts like channelling and price symmetry to find the best possible trade signals. Also, read about Personality Strengths and Weaknesses in Forex Trading.
If the trade works in our favor then we have a really good chance to have a good trade, in terms of risk to reward ratio. With trading experience, it will become much easier to spot the Wolfe wave patterns.
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