Studying the Wolfe Waves reverse pattern
If traders using the Three Little Indians capitalize on the inability of the bulls or bears to continue the current trend, and the Expanding Wedge points to an increase in volatility and aggravation of the struggle between the opponents for the initiative, their combination represents a fairly powerful reversal formation. We started studying it in the previous article.
Today I would like to continue and talk about the Wolfe Wave pattern, which was sensational in the trader community. Some sources claim that the pattern is too complex and not intended for beginners. In my opinion, if you have read and understood the previous posts of this educational blog, it will not be difficult for you to understand the methodology of its formation and use.
The Wolfe Waves is nothing more than an expanding wedge. Indeed, we see several successive maxima and minima, and the count begins at point 1. It is called the base of the first decline for the bearish pattern (the base of the first top for the bullish pattern). The word base is used for a reason: it is understood as a line of three consecutive extremes - points 1, 3 and 5. Unlike the Three Little Indians, they do not necessarily have to be tops on the bullish market or bottoms on the bearish one. Point 1 can be formed under consolidation conditions.
GBP/USD, bearish Wolfe Waves pattern
Then, the numbering of highs and lows usual for expanding wedges occurs. A vital condition for the formation of the pattern is the location of point 4. For the bullish Wolfe Waves pattern, it must be above point 1, for the bearish version - below point 1.
EUR/JPY, bullish Wolfe Waves pattern
The traders working with the Expanding Wedge pattern on the basis of the Three Little Indians might have noticed another important difference: in Wolfe Waves, point 4 is above point 2 (bearish formation), or vice versa (bullish formation). Therefore, we cannot talk about having to have renewing extremes. In my opinion, this indicates the weakness of opponents and increases the risks of reversal.
Taking into account the fact that point 5 can be formed above line 1-3 (the bearish pattern), the author recommends using a sweet zone to build a trading strategy based on the pattern. For this, the projection of line 2-4 is transferred to point 3. The formation of the last extremum in the intersection of this projection and line 1-3 allows the trader to find the entry point. For greater confidence, candlestick patterns can be used, as in the case of Three Mountains or Three Rivers. The position should be closed when the quotes reach the target lying on the line 1-4.
GBP/USD, trading strategy based on the Wolfe Waves
Undoubtedly, there are much more strategies based on the Wolfe Waves pattern, and we'll talk about them in subsequent articles. In conclusion of the current post, I would like to say a few words about the correctional pattern. When making trades with the help of the graphic configurations, you don't have to abandon the principle "The trend is your friend, trade with the trend".
AUD/USD, Wolfe Waves correctional pattern
The Three Little Indians underlying the Wolfe Waves pattern, will tell you when the corrective movement is exhausted, and targeting at the level of line 1-4 will allow to partially or completely consolidate the profit. It should be understood that the studied formation in this example is reversal to a short-term uptrend. Which, in turn, is nothing more than a correction to a bearish trend of a higher order.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.