Best Wolfe Wave Strategy - Alpha Wolf Trading
The best wolfe wave strategy is a trading strategy with high-profit loss ratio above 90%. Wolfe waves were introduced by 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.
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 a security is likely to experience a sudden change in value.
After the first four “waves” have formulated, 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).
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.
Wolf 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.
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 wolf 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.
You could say that the wolfe waves chart pattern is an advanced channeling 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).
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 Wolf 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 the 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 to develop 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.
Step #4: Draw a trendline that connects the 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 the 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, often time 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.
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 that 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.
Conclusion - Best Wolfe Wave Strategy
The wolfe wave strategy is a trading strategy built around waves the same like Elliott Wave trading. We use other trading concepts like channeling and price symmetry to find the best possible trade signals. Also, read about Personality Strengths and Weakness 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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