How to Trade Wolfe Wave Pattern

Jun 29, 2023

I will try to explain to you about the Wolf pattern. I myself prefer to call this formation a Wolf pattern rather than a wave, because it will not always remind of a wave and has nothing to do with the Elliott Wave Analysis.

Before I get to the practical part, I want to note that this pattern is very easy to learn and often allows you to get a fantastic ratio (R:R). The flip side of the pattern is the art of determining its completion.

Bill Wolf is the discoverer of this formation. He likes to call his trading a wave trading and for some reason explains the work of the pattern as a demonstration of Newton's law. His real achievement is the numerous study of the well-known wedge pattern, which he was so fond of, and the finding of patterns in it.

All we have from the author is a little book. And the website wolfewave.com, the design of which has been preserved since '98. Bill's friendship with trader Linda Raschke is well known. In her book, Linda describes the Wolf wave as a quite profitable formation.

It should be noted that especially skillful traders can detect Wolf waves practically in all price movements. Indeed, this characteristic formation of "spreading" can be found constantly, even if it does not have all the expressed qualities that are characteristic of an ideal wave. In traditional trading, the Wolf will often look like the famous and beloved wedge, but our task will be to enter and exit the trade more precisely.

Formation
1. We determine point 2 as the top of the uptrend (a significant top).
2. Point 3 is the next minimum after point 2.
3. Point 4 is the next high after point 3 and is located below point 2.
4. Point 1 is insignificant, ideally it is the minimum before point 2, but sometimes point 1 is very weakly expressed. In this case, Bill Wolf himself recommends to draw a horizontal line to the left of point 3 and take the first bar opposite it as point 1.
5. The point 5 is on the line 1-3, or it often breaks through it, going to the sweet zone. The sweet zone is constructed by parallel transferring the line 2-4 to point 3.
6. Point 6 (target) is on the line 1-4 (EPA - Estimate Price at Arrival) and is determined by the vertical from the point of intersection 2-4 and 1-3 (ETA - Estimate Time on Arrival).


How to Trade the Wolf with Trend
For the purposes of this article, we will be looking at Wolf waves primarily on trend. I strongly recommend trading them this way. In this way, the pattern will be a correction, the end of which we are trading. In addition, a couple of alternative examples will be given (Wolf as a trend reversal, Wolf in a sideways trend).
Let's take a good trend, in this case the uptrend on CADJPY, and highlight the correction. Then let's move to H1 and see if there are any Wolf waves among these corrections:

Example 1
In the first case we have a great Wolf wave. I pay attention to the clear arrival time of the target (ETA). R:R = 3.0.
https://www.tradingview.com/x/YqCM7ZE0/
Example 2.
In the second case, we don't have the prettiest formation. Many would argue that it is a Wolf wave, but I assure you that it is.

The ETA also clearly worked and we got R:R = 3.5.

Note
Wolf waves are quite frequent formation. Their best working out is trend trading, there are plenty of them. Even more of them are in the sideways. It can be said that a sidewall is a constant succession of Woolf waves in different directions. Perhaps, someone may apply this style to a flat, but a sideways trend can be traded more traditionally. An ideal wave is not always found. There are traders who prefer to wait for them without considering other Woolf waves as such.

Practice
Perhaps, we have come to the most interesting part of the article. Here I will just try to outline the best possible way to enter a trade and the best way to get out of it. The advice given in this section is a subjective result of trading and is provided for general guidance. I am convinced that a practicing trader will find the optimal TS settings by himself.

Examples
Any TS has its disadvantages and if the speculator gets along with them, he makes the TS "his", otherwise he has to look for another instrument, picking it up like a puzzle that suits him psychologically. The problem of the Wolf wave, on the other hand, is the search for the point 5.


Recent example

We use Fibonacci extension tool to identify optimal entry point. Fibonacci extension level such as 1.13, 1.272, 1.141 and 1.618.


Conclusion
In this article I have tried to set forth my view of the Wolf wave. As I see it, this pattern is well underestimated by the mass of suffering traders.