Wolfe Waves Quick Start

the charts have a number of bars on them. Each bar represents a trading day. The chart will also show either a 5 point wolfe wave, a 4 point wolfe wave, or the legend 'no waves found'.

A 5 point wolfe wave is a 'complete' wave - in other words the pattern is complete, and price has begun (or is soon to begin) running towards the red line. This pattern also has 2 grey lines that show the natural support and resistance of the wave as it formed. Here is a typical 5 point bearish wolfe wave chart of the FTSE 100:-

Price is shown along the left vertical axis. The date of the first and last bars is shown along the bottom of the chart. Top right are labels with the dates of the points that comprise the wave (the points themselves are colord blue). In the center of the chart are 2 grey lines and a red line, all angled. As you can see, the wave completed on 7th Feb, and the small red triangle shows the point from which you could expect price to fall rapidly to meet the red support line. WHEN that will be is anyone's guess - although wolfe waves involve a good degree of symmetry, the point where price reaches the red line could be a few days off or a few weeks. Here is an example of a bullish 5 point wolfe wave of popular stock EBAY:-

Once again, the wave has completed, although the final point did not actually fake a breakout downwards thru the bottom grey line, and ended up running a long way past the red line. The green triangle shows the point where the wave completed, and where you should have been considering opening a long position.

A 4 point wolfe wave is incomplete - typically you would expect price to fake a breakout upwards (in the case of a bearish wave) before heading south to the red wolfe wave support line, or to fake a breakout downwards in the case of a bullish wolfe wave. Note that although the 'classic' pattern does indeed break the top grey line (in the case of a breakout before a bearish wolfe wave begins), it may not, and may begin to run downwards without penetrating the top resistance. The same goes for a bullish wolfe wave - it may not actually fake a breakout downwards before running up to the red line resistance.

As you can see, to complete the wave, a 5th point is needed. In a classic 5 point wolfe wave, price needs to rise up and fake a breakout thru the top grey line. You could then expect price to fall all the way back to the red line in order to complete the wave.

Theory behind Wolfe Waves

The basic idea is all about balance. The market has a tendency to become unbalanced, and then to correct itself. Wolfe Waves are an example of that self balancing mechanism in operation. Let's consider a basic 'bull' wolfe wave.

Points 1 and 3 are lows. Points 2 and 4 are highs. What you are looking for is SYMMETRY. The gaps between the points should NOT be too different. That's not to say that a wolfe wave with 'outlier' points isn't valid, just that the more symmetry it shows, the more you can trust it. As you can see, the decreasing wedge ends at point 5 where a fake breakout downwards is the prelude to the balancing move, which takes price all the way to the red resistance line. The red line is drawn from the LOW of point 1 thru the HIGH of point 4 and extended off into the future to show where price will encounter natural resistance to the bull move. How about a bear wolfe wave?

This is the reverse of the bull wave. 1 and 3 are highs, 2 and 4 are lows, forming a decreasing upwards wedge. Point 5 is a fake out upwards thru the grey line extended thru the highs of 1 and 3. After that, it should be downwards all the way to the natural resistance at the red line, which is drawn thru the high of point 1 and the low of point 4 to create the perfect wolfe wave.

Disclaimers apply.