Studying trading strategies based on the popular pattern Wolfe Waves
Let's continue how to buying and selling in a right way in a trading platform on forex. Today we will speak about Wolfe Waves trading system, the forex trading strategies that work.
Today we will speak about Wolfe Waves trading system. At the heart of the technical analysis is the principle of extrapolation: what happened one day can never happen again, but what happened two times will necessarily happen the third time. The trader needs to look for familiar patterns in the charts in the hope that they will work out. Certainly, no one will give you 100% guarantees, but the high probability of the patterns working out in the past multiplied by the ability to effectively manage capital opens the way to impressive results. However, pattern identification alone is not enough. It is important to build a competent strategy on its basis.
In the previous article, we learned how to find the Wolfe graphs on the charts, now it's time to get the pattern to work for us. Any trading system includes four elements: entry, setting a protective stop order, identifying the target, and controlling the position. In this case, the opening of longs for the bullish model or shorts for the bearish one occurs within the previously described strategy of tests and peaks. Let me remind you, the first system tries to catch the falling daggers, the second one assumes a more cautious approach.
The entry based on tests in the case of Wolfe Waves is the use of the sweet zone described by the author. It is built by transferring line 2-4 to point 3. The resulting triangle is a place for the creativity of traders. A position can be opened at the time of the return of quotations within the limits of the traded pattern. In the example with GBP/USD, the buy order is set at the resistance breakout level in the form of line 1-3, the stop order is placed at the bar's low at point 5. It should not be forgotten that for the tests, the protective stop orders are narrow, and the entry into the position can be made several times in succession as the stop signal is worked out.
Trading on peaks involves additional signals confirming the reversal. This can be the Head and Shoulders pattern (or any other countertrend trading pattern), as in the case of GBP/USD, or the break of trend lines acting as diagonal support or resistance levels. Exit of the quotations of the currency pair outside the trading channel is in itself a serious signal, and coupled with the Wolfe Waves pattern it is a good reason for the formation of positions. The protective stop order in the first case (combination of patterns) is placed below the bar low at point 5, in the second (combination of the pattern and trend lines) - in the correctional low area. It should be noted that trading with Wolfe's Waves does not exclude the possibility of building up positions, including through joint use of tests and peaks.
The classical approach provides for an exit from the transaction as the quotations of the currency pair reach the line 1-4. At the same time, a perpendicular projection drawn to wave 1-4 from point 5 can be used. It will give you an intermediate target, which is achieved much more often than the previous target benchmark. Using the projection allows you to customize the process of controlling the position. For example, as it is reached, a trader can:
- close the position completely,
- move the protective stop order to the breakeven point,
- take a part of profit and move the protective stop order to the breakeven point.
Thus, the Wolfe Waves pattern represents ready-made solutions for forex trader that allow the past patterns to be transferred to the future and traded out on the basis of extrapolation. Simply put, this is a classic price action pattern, a trading system without indicators. However, as we said in relation to other patterns, no one will punish you if you use the system filters.
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Price chart of GBPUSD in real time mode
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.