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Jan 11, 2008 - The Wolfe Waves rarely appear in daily charts but more so in intraday charts such as 60-minutes and lower...
The traditional patterns such as double-top, double-bottoms, triangles are the usual patterns recognized and described by many authors and experts. There are always new concepts derived from these patterns to give a better perspective. One such is the Wolfe Waves. Wolfe shares a similar pattern to the traditional rising wedge, bull flag or pennant as well as a falling wedge, bear flag or pennant. In the chart example below, a traditional pattern is drawn from two red trendlines: one from pivot 1 to 3 to 5 and the other is from pivot 2 to 4. This is where the similarities end. Once this pattern is drawn, the next step is to draw the target where the expected prices will move to. Once the five pivots have been identified and the two trendlines are drawn, the Wolfe pattern adds additional trendline (in blue) from pivot 1 to 4, cutting through the prices (a capital rule in drawing trendlines is that never draw through price bars from pivot highs to pivot lows, always pivot high to pivot high and pivot low to pivot low). In this case, a line is drawn through the price bars from top left to bottom right, to find the price target from pivot 5.
The blue line draws towards the bottom right of the chart, expecting prices to drop that that level. Within less than a week, prices did indeed moved down and reached its profit target. Another example is taken from YHOO’s recent action. In this rising wedge or parallel channel at a steep angle (from pivot 1 to 5), the first red trendline is drawn from pivot 1 to 3, with an expectation that prices will reach the trendline again to market pivot 5. Then the second red trendline is drawn from pivot 2 to 4. Once the two trendlines are in place, a blue trendline is then drawn from pivot 1 to pivot 4 crossing the price bars to find the possible target. Once the pivot is spotted, the next step is to wait for the price action to confirm the pattern. That action occurs when the pivot 5 appears and reverses at the trendline.
How does one trade this pattern? Pivot 5 is the crucial area to watch for an entry. When prices touch the trendline that forms the pivot 1 and 3, watch for prices to move back to that trendline. If prices are rejected and moves away from the trendline, then waves are confirmed and an entry is taken. Below is the chart with the entry point (red down arrow) and a stop loss order (red horizontal line). When the big green bar shoots up toward the pivot 5, the next bar is red, indicating a reversal is taking place. The next entry was the breakout of the low of that red bar, which didn’t happen at the next bar but the following red bar. An entry and the target are far apart, giving it a very high profit potential on the trade. In this case, the target was almost reached but with a proper position management such as a trailing or moving the stop loss in the direction of the trade would have taken out the trade with a fairly handsome profit. Another example of the Wolfe Waves was spotted recently on the GOOG chart. Figure 4 shows prices began faltering as the retest (pivot 3) failed to reach a higher high (higher than pivot 1). The market then tried again for the third time (pivot 5), this time if the failure was again evident, the bears were ready to pounce and pushed the prices down hard. Indeed, on pivot 5, prices were rejected again immediately upon touching the trendline. The short entry was made upon the break of the low of the bar that touched the trendline (red down arrow). The stop loss order would be placed just above the pivot 1 (highest of the three highs). The target has been determined already with the blue trendline drawn, which is just near the pivot 2 price levels.
The Wolfe Waves rarely appear in daily charts but more so in intraday charts such as 60-minutes and lower. Although they appear complicated and messy at first, but after some experience and screen time, the pattern will provide ample opportunities to take high profit margins.
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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