Unlike other chart patterns, the Wolfe wave forecasts where the price is going and when it will get there. What other patterns will do this for you? If I had a quarter for every time someone said they wished they had a crystal ball to predict stock prices, I’d be rich. But what if I told you there was a crystal ball? The Wolfe Wave pattern is as close to a crystal ball you’re going to get in trading. If you’re wondering how to make money trading this pattern, you’ve come to the right place.
What Is a Wolfe Wave?
- Stripped down to it’s basics, a Wolfe Wave pattern comprises five supply and demand waves used for two things.
- To predict where the price is going
- To predict when it will get there.
- Each wave represents a struggle as price fights towards an equilibrium.
- What’s fantastic is that they can unfold in any time frame. Regardless of your penchant for the 1-minute chart or the one month chart, you can use this pattern.
- By drawing a line between the first and fourth points, you create a profit target line showing you where price will go
- You enter in to a long or short position at the beginning of the fifth point
- Its a variation of the falling wedge chart pattern.
Identifying the Wolfe Wave Pattern
First identified by Bill Wolfe and his son Brian, these patterns are a game-changer. Occurring naturally in all markets, if you learn to spot them and ride em, you’ll be laughing all the way to the bank.
Obviously, the key word being spot as not all crests meet the Wolfe Wave criteria. That said, to ensure you’re seeing a WW roll out, you must identify a series of price oscillations that correspond to the following criteria:
- The waves cycle at consistent time intervals.
- Waves 3-4 need to stay within the channel created by waves 1-2.
- Waves 1-2 show symmetry with waves 3-4.
- Wave 4 is contained within the channel created by waves 1-2
- Wave 5 exceeds the trendline created by waves 1 and 3 and breaks out of the channel; this is your entry point.
The Wolfe Wave Predicts Where Price Will Go
Yes, you read that correctly! Let me explain. By drawing a line between the first and fourth points, you create a profit target line.
In other words, the extension shows you where the price will go. I’m not lying; this stuff works. If you want to know how to predict when a stock will go up, then check this pattern out!
How to Trade the Wave
- At Bullish Bears, we don’t just take any trade; we take high probability trades. And a high probability bullish Wolfe wave trade is one with a prior bearish trend. Thus, look to have a clear bearish or bullish trend before trading the this formation. Assuming you identify the wave correctly, the fifth wave’s beginning is where you enter into a long or short position. You take profit at the point where line one and four ends.
Trading the Bearish Wolfe Wave
The chart below shows an ideal case of a bearish WW pattern and is quite simple to trade.
To trade, you simply:
- Wait until price hits point 5 and sell. A word to the wise, don’t go in blind; confirm your entry with a bearish reversal candlestick.
- Take your profit and go long once price hits the line extending from points 1 and 4.
Trading the Bullish Wolfe Wave
The chart below shows an ideal case of a bullish Wolfe Wave pattern. And just like it’s partner in crime above, it’s quite easy to trade.
To trade, you simply:
- Wait until the price hits point 5 and buy. Your buy confirmation is a bullish reversal candlestick.
- Take your profit and sell once price hits the line extending from points 1 and 4.
Living to Trade Another Day
We talk a lot about risk management as it’s the cornerstone of a healthy trading plan. Without a doubt, the most important thing you can do as a trader is to cover your butt.
When trading the WW, place your protective stop loss below the last wave or wave 5. Doing so will give you a very tight stop loss as a break below wave 5 invalidates the pattern.
It’s a great momentum trading play. You can watch Rose trade it in our Futures room as well as our regular room on Thursday mornings.
The Wolfe Wave Is a Fancy Version of a Channel
- If you take a birds eye view of that chart, you’ll notice the five alternating Wolfe waves form a perfect channel; or an ascending/descending wedge. In some cases, we can even see a flat channel.
Another thing to be on the look for is how quickly the price goes back into the channel. As a general rule of thumb, only trade waves that quickly retrace back into the range.
But What if I Suck at Identifying Waves?
Luckily it’s not hard to spot wolf wave patterns. Did you know that some trading platforms have the Wolfe Wave indicator built-in for those lazy (i.e. me), or shall I say, efficient traders!
However, if your trading platform doesn’t, don’t despair. You can simply use the channel indicator to help you better visualize the Wolfe Wave pattern.
Bullish Bears Is Killing It With Wolfe Wave Trading
Fundamentally, the wolf wave trading strategy is an excellent market timing tool that every trader should know how to use. And we want to help you succeed in trading the Wolfe Wave strategy.
But to make it work, it’s essential to pay attention to it’s rules. Otherwise, the pattern may just be a product of random price oscillations.