The Wolfe Wave Critique by BeginnerTrader  The Bullish & Bearish Wolfe Waves - Taken from Bill Wolfe's Book You can see from these basic example charts, that a Wolfe Wave is essentially an ascending or descending wedge depending on the market conditions. For a wedge to be called a Wolfe Wave it must consist of four waves with the end of the fourth wave (marked 5 in the above charts) reaching, or exceeding the wedge pattern extremes. EPA stands for Estimated Price at Arrival, which doubles as your profit taking line. ETA, stands for Estimated Time of Arrival (and should be completely ignored, even Wolfe himself acknowledged this, which makes you wonder why he mentioned it at all really?). Wolfe's basic premise for trading these patterns is to wait for point 5 to enter a trade, and look for the line marked EPA to be your target. Looks wonderfully easy in hindsight doesn't it. So why do they work (sometimes)? Wolfe waves work on the psychological frailty of the novice trader. The best Wolfe waves tend to be those that are pointing in the direction of the established trend. Trends are wonderfully easy to find after they have confirmed themselves with three to four waves. Before that they look like a standard retracement in the previous trends direction. It is only after that retracement fails, that a new trend is suspected, and once a new high/low is set in the opposite direction, it is then we can think a new trend is has formed. The professional/experienced trader can usually find signs of these developing trends earlier and jump on the departing train. The inexperienced trader, needs multiple confirmations, before they agree a trend is in place. The result being increased pressure on the retracements in the final stages of the trend from the late arrivals, meanwhile the big money slowly jumps of the impending train wreck, meaning shallower proportional breaks of new highs and lows. Really the Wolfe wave is no more than a technique to trade a matured wedge pattern, telling you where to enter, and where to look to take profits. The entry is based on the concept of a final exhaustive run in the direction of the trend, using up the last of the buyers/sellers. Price then reverses suddenly and heads off towards the EPA, which hold similar concepts to the Axis lines I talked about in a previous article. So how do you trade it. To trade a Wolfe wave consistently you need to recognise the inherent weakness of the technique itself, that is; 1. You are trying to catch a falling knife. 2. You are entering after a new high or low has been made, making identifying entry locations difficult. 3. Your trip to your target is against the previous trend .. making it a bumpy ride at times as people get out of positions. Written by: BeginnerTrader It's Reversal Qualities An upward sloping trending channel will result in a bearish reversal of price and a downward sloping trend channel will result in a bullish reversal of price. Generally the Wolfe wave can be seen when the price is contained within a channel and can give traders a good idea when the price is going to break-out of the channel and reverse. These channels can be parallel as per our Range and Channel Trading section, or can converge as per Wedge Patterns. Within these channels the Wolfe Wave has an amazing symmetrical pattern, with the wave cycles having equal time intervals between them. This symmetry can be seen in our QQQQ chart below.  QQQQ. Bearish Wolfe Wave Example When charting the Wolfe wave the channel is formed by the end points of waves 1 to 3 - i.e points 1, 2, 3 & 4. Once we have these peaks and troughs we draw our trend lines. In our example they are converging, but in many cases they are parallel, or diverge. Now wave 4 (between points 4 & 5) can either be contained within this channel or over-shoot, as seen in our example. In any event wave 5 will re-enter the channel and then head towards a target "equilibrium" (Wolfe's word) price level. We'll talk about this target more later. As shown in the our 5 minute QQQQ chart, the most accurate patterns exist where there are equal time intervals between wave cycles (1, 3 & 5). Our example above is an up trend channel forming a bearish Wolfe wave. The Wolfe Wave's Psychology Bill Wolfe suggests that the wolf wave is a naturally occurring harmonic pattern, found in all financial charts, all of the time. This suggests that there's no psychology behind it. If you want to get to grips with the psychological mindset of the market, then other technical analysis will have to be utilised. For instance the use of volume, support & resistance and price action may be useful in understanding the market's psychological state. Of course, Bill Wolfe and his disciples would be against the use of additional indicators, as Wolfe suggests that the Wolfe Wave stands alone in it's methodology. The choice is yours... The key points of The Wolfe Wave Below I've listed the key points traders look for when identifying the pattern, developing it and eventually playing it
Trading the Wolfe Wave Both the bear example and the bull Wolfe wave are traded in exactly the same ways . You’ll notice in our above QQQQ example point 5 overshoots resistance in the bearish Wolfe wave. When wave 5 overshoot support or resistance the returns to the channel this is known as a false price breakout. The break-out line indicates the ideal place to enter the trade.
The Bullish Wolfe Wave The bullish wave (i.e, a Wolfe wave forming in a down trend) will form as a mirror image of our above QQQQ example. In the below Bullish Wolfe Wave example, Points 1 and 3 will form support and points 2 and 4 form resistance. Point 5 will overshoot support with a target point (6) forming above the channel.  Bullish Wolfe Wave Example To Sum Up It is important to note that Wolfe Waves, are highly subjective and may need other technical analysis to figure out the market psychology (although Bill Wolfe, probably wouldn't agree with the use of further TA). The key to profiting is accurately identifying and exploiting these trends in real time, which can be more difficult than it sounds. As a result, it is wise to trade this technique with a practice account - as it is any new technique you are learning - before going live. And, remember to use stop/loss to limit your losses.Technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course. | In Bill Wolfe's own WordsWhy does the WolfeWave work so well? Market timing is not about finding the Holy Grail. Market timing is not about complicated algorithms. Market timing is not about colorful indicators and oscillators. Market timing is about BALANCE. An Example: We're at the 5 point and the market just opened. TV has been telling traders that the market is going to have a "great day" because Globex is up and the market is sure to open higher. How many times have you heard it? How many times has it failed? WolfeWave practitioners giggle. They know that the market is now out of balance and will soon correct to the downside, big time! Two hours later: Price hits WolfeWave target line.  Bill Wolfe Example - Click to Enlarge The Wolfe Wave is a "stand alone" methodology. The Wolfe Wave doesn't use traditional chart patterns or indicators. Written By Bill Wolfe |
The Wolfe Wave Critique by BeginnerTraderThe Bullish & Bearish Wolfe Waves - Taken from Bill Wolfe's Book You can see from these basic example charts, that a Wolfe Wave is essentially an ascending or descending wedge depending on the market conditions. For a wedge to be called a Wolfe Wave it must consist of four waves with the end of the fourth wave (marked 5 in the above charts) reaching, or exceeding the wedge pattern extremes. EPA stands for Estimated Price at Arrival, which doubles as your profit taking line. ETA, stands for Estimated Time of Arrival (and should be completely ignored, even Wolfe himself acknowledged this, which makes you wonder why he mentioned it at all really?). Wolfe's basic premise for trading these patterns is to wait for point 5 to enter a trade, and look for the line marked EPA to be your target. Looks wonderfully easy in hindsight doesn't it. So why do they work (sometimes)? Wolfe waves work on the psychological frailty of the novice trader. The best Wolfe waves tend to be those that are pointing in the direction of the established trend. Trends are wonderfully easy to find after they have confirmed themselves with three to four waves. Before that they look like a standard retracement in the previous trends direction. It is only after that retracement fails, that a new trend is suspected, and once a new high/low is set in the opposite direction, it is then we can think a new trend is has formed. The professional/experienced trader can usually find signs of these developing trends earlier and jump on the departing train. The inexperienced trader, needs multiple confirmations, before they agree a trend is in place. The result being increased pressure on the retracements in the final stages of the trend from the late arrivals, meanwhile the big money slowly jumps of the impending train wreck, meaning shallower proportional breaks of new highs and lows. Really the Wolfe wave is no more than a technique to trade a matured wedge pattern, telling you where to enter, and where to look to take profits. The entry is based on the concept of a final exhaustive run in the direction of the trend, using up the last of the buyers/sellers. Price then reverses suddenly and heads off towards the EPA, which hold similar concepts to the Axis lines I talked about in a previous article. So how do you trade it. To trade a Wolfe wave consistently you need to recognise the inherent weakness of the technique itself, that is; 1. You are trying to catch a falling knife. 2. You are entering after a new high or low has been made, making identifying entry locations difficult. 3. Your trip to your target is against the previous trend .. making it a bumpy ride at times as people get out of positions. Written by: BeginnerTrader It's Reversal Qualities An upward sloping trending channel will result in a bearish reversal of price and a downward sloping trend channel will result in a bullish reversal of price. Generally the Wolfe wave can be seen when the price is contained within a channel and can give traders a good idea when the price is going to break-out of the channel and reverse. These channels can be parallel as per our Range and Channel Trading section, or can converge as per Wedge Patterns. Within these channels the Wolfe Wave has an amazing symmetrical pattern, with the wave cycles having equal time intervals between them. This symmetry can be seen in our QQQQ chart below. QQQQ. Bearish Wolfe Wave Example When charting the Wolfe wave the channel is formed by the end points of waves 1 to 3 - i.e points 1, 2, 3 & 4. Once we have these peaks and troughs we draw our trend lines. In our example they are converging, but in many cases they are parallel, or diverge. Now wave 4 (between points 4 & 5) can either be contained within this channel or over-shoot, as seen in our example. In any event wave 5 will re-enter the channel and then head towards a target "equilibrium" (Wolfe's word) price level. We'll talk about this target more later. As shown in the our 5 minute QQQQ chart, the most accurate patterns exist where there are equal time intervals between wave cycles (1, 3 & 5). Our example above is an up trend channel forming a bearish Wolfe wave. The Wolfe Wave's Psychology Bill Wolfe suggests that the wolf wave is a naturally occurring harmonic pattern, found in all financial charts, all of the time. This suggests that there's no psychology behind it. If you want to get to grips with the psychological mindset of the market, then other technical analysis will have to be utilised. For instance the use of volume, support & resistance and price action may be useful in understanding the market's psychological state. Of course, Bill Wolfe and his disciples would be against the use of additional indicators, as Wolfe suggests that the Wolfe Wave stands alone in it's methodology. The choice is yours... The key points of The Wolfe Wave Below I've listed the key points traders look for when identifying the pattern, developing it and eventually playing it
Trading the Wolfe Wave Both the bear example and the bull Wolfe wave are traded in exactly the same ways . You’ll notice in our above QQQQ example point 5 overshoots resistance in the bearish Wolfe wave. When wave 5 overshoot support or resistance the returns to the channel this is known as a false price breakout. The break-out line indicates the ideal place to enter the trade.
The Bullish Wolfe Wave The bullish wave (i.e, a Wolfe wave forming in a down trend) will form as a mirror image of our above QQQQ example. In the below Bullish Wolfe Wave example, Points 1 and 3 will form support and points 2 and 4 form resistance. Point 5 will overshoot support with a target point (6) forming above the channel. Bullish Wolfe Wave Example To Sum Up It is important to note that Wolfe Waves, are highly subjective and may need other technical analysis to figure out the market psychology (although Bill Wolfe, probably wouldn't agree with the use of further TA). The key to profiting is accurately identifying and exploiting these trends in real time, which can be more difficult than it sounds. As a result, it is wise to trade this technique with a practice account - as it is any new technique you are learning - before going live. And, remember to use stop/loss to limit your losses.Technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course. | In Bill Wolfe's own WordsWhy does the WolfeWave work so well? Market timing is not about finding the Holy Grail. Market timing is not about complicated algorithms. Market timing is not about colorful indicators and oscillators. Market timing is about BALANCE. An Example: We're at the 5 point and the market just opened. TV has been telling traders that the market is going to have a "great day" because Globex is up and the market is sure to open higher. How many times have you heard it? How many times has it failed? WolfeWave practitioners giggle. They know that the market is now out of balance and will soon correct to the downside, big time! Two hours later: Price hits WolfeWave target line. Bill Wolfe Example - Click to Enlarge The Wolfe Wave is a "stand alone" methodology. The Wolfe Wave doesn't use traditional chart patterns or indicators. Written By Bill Wolfe |