What Is Wolfe Wave? Definition & Trading Examples With Charts

Wolfe Wave is a price action pattern that is made up of 5 waves which show supply and demand as price fights towards an equilibrium price.

Wolfe wave patterns  can develop in any timeframe, from the 1 minute up to the monthly chart and they are used for two things:

  1. predict where price is heading
  2. when it will get there.

Now, as you will read later in this article,the “WHEN” will price get there is not as important as where price is heading.

This post is my own interpretation of what wolfe wave is by reading other articles on wolfe wave online.

Wolfe Wave Analysis

Wolfe waves can be bullish or bearish.  These two charts below shows the difference between the two.

Wolfe Wave Analysis

Bullish and Bearish Wolfe Wave Example (Image Source:www.insidefutures.com)

Here are 2 things you may not realize….look at the above two charts carefully, what do they remind you of?

Falling and rising wedges?  Thomas Bulkowski did mentioned on his website that the bullish wolfe wave is  a variation of the falling wedge chart pattern.

You see, a bullish wolfe wave is a variation of the falling wedge chart pattern. If you don’t know what a falling wedge chart pattern is, then it looks like this:

falling wedge chart pattern

Falling Wedge Pattern In EURAUD (Image Source: www.forexabode.com)

Now, a  bearish wolfe wave is a variation of the rising wedge chart pattern. Here’s what a rising wedge chart pattern looks like:

rising wedge chart pattern

Rising Wedge Pattern In USDCHF (Image Source: www.forexabode.com)

Rules & Structure Of Wolfe The Wave Pattern

The 3 common places where wolfe wave can be found are these:

  1. channels in an  uptrend (look for bearish wolfe wave)
  2. and channels in a downtrend (look for bullish wolfe wave)
  3. and also on horizontal channels when price is consolidating.

And to be considered a wolfe wave, the following rules must be obeyed:

  1. Waves 3-4 must stay within the channel created by 1-2
  2. Wave 1-2 equals waves 3-4 (shows symmetry)
  3. Wave 4 is within the channel created by waves 1-2
  4. There is regular time between all waves
  5. Wave 5 exceeds trendline created by waves 1 and 3 and is the entry point
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If you are really interested in wolfe wave trading, the above 5 rules will really make things very clear on what to do when drawing wolfe waves. It will also help you eliminate patterns that do not meet this criteria.

Wolfe Wave EPA Line & ETA Line-What Do They Mean?

EPA stands for Estimate Price at Arrival. So the EPA line main objective is to show where a currency pair will touch that line extended into the future.

So the EPA line is all about PRICE…

Another thing to note about wolfe wave EPA lines that if they are very steep, price have less chance of reaching it.

Ok, what about Wolfe Wave ETA line?

If you’ve booked airplane tickets, you’d know what this means. It stands for Estimated Time on Arrival.

Ok, in the wolf wave trading scenario, the ETA line is used to estimate at what date price will arrive at the apex of the two converging lines.

Remember, on the mt4 chart, the date is on the bottom of the chart. At the very apex where the two converging lines meet, if you look straight down, you see the date (in the future) that would coincide with the apex (where the two converging lines meet), right?

That’s the purpose of that: to find what date in the future price will arrive at that point.

The ETA line is all about TIME, date.

Do the ETA line work?

Rarely. So you shouldn’t really be bothered about it at all.

The more important line is the EPA line and that’s the one you should know how to draw and trade it.

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How To Draw The Wolfe Wave EPA Line

Regardless of whether the wolfe wave is bullish or bearish, the wolfe wave EPA line is always drawn connecting points 1 and 4 in the wolfe wave pattern.

How To Trade Wolfe Waves

Not knowing that a potential bullish or bearish wolfe wave pattern is forming is the main difficulty many traders have with trading wolfe waves.

Part of the problems to is that if you are not aware about it or are not SERIOUSLY looking for it, you are not going to see it form on your chart even if you are looking at that chart.

Why?

Because you are looking for something else and not trying to spot wolfe wave patterns forming on your chart.

That’s why you’d miss it.

But if you are really looking and searching for wolfe wave patterns in your charts, you’d see these patterns.

It may take a while because it is not a very easy trading concept to grasp especially if you are a new forex trader.

In order for you to trade wolfe waves:

  • first you have to know how to spot a wolfe wave pattern when its forming
  • and know at what point you have to buy or sell
  • and what point you have to take profit and exit a trade.

How To Trade A Bearish Wolfe Wave

This first chart below shows an ideal case of a bearish wolfe wave pattern.

bearish wolfe wave

Trading the bearish wolfe wave pattern is really simple:

  • Point 5 is where you sell. Ideally, you just don’t sell blindly. What you do is wait for bearish reversal candlesticks to confirm your analysis and then sell.
  • the EPA line is a line extended into the future so really, you cannot setup a profit target price once you’ve entered a sell trade. You will actually have to monitor it and as soon as price hits that EPA line, you take your profit and exit the trade.
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How To Trade A Bullish Wolfe Wave Pattern

This chart below is an ideal case of a bullish wolfe wave pattern:

bullish wolfe wave

You do the same thing but opposite to what you did in the sell trade using the bearish wolfe pattern:

  • once you’ve can see that a bullish wolfe wave pattern may be forming, you wait until price hits point 5 and then use bullish reversal candlesticks as your signal to buy.
  • you take profit as soon as price hits the EPA line.

Some Wolfe Wave Chart Examples

Here are few examples of wolfe wave trading charts. The first chart shows a Buy setup and trade on Bullish Wolfe wave chart:

trading wolfe wave in forex example

Image source: www.investoo.com

 

This second chart shows a bearish wolfe wave trade setup:

wolfe wave charts example 1

Image source: www.investoo.com

 

This chart below also show a bearish wolfe way pattern trade setup:

Wolfe Wave Trading Example

Image Source: trade2win.com

Summary

I do not trade wolfe waves and I don’t need to because the price action strategies I use, to an extent, are the same sort of trading concepts as that of wolfe wave trading: its all about trendlines and price channels. I really don’t need to add another layer of complexity into what I know works on my side.

But, if wolfe wave trading is what you are after, I hope I have provided you a very good rundown of what wolfe wave patterns are, how to spot the patterns and trade them.

Don’t forget to tweet, like, share or mention this in other forex blogs/sites if you have the opportunity to.

 Resources For Further Reading

  1. Bulkowski’s Bullish Wolfe Wave at www.thepatternsite.com 
  2. The Wolfe Wave Forex Trading Strategy at www.investoo.com
  3. Stock Market – Bearish WOLFE WAVE (S&P 500 – DOW – NASDAQ) www.insidefutures.com
  4. Applying Wolfe Waves To Forex www.tradet2win.com