WOLFE WAVE
Tuesday, January 31st, 2012WOLFE WAVE - WHAT IS THE WOLFE WAVE?
Waves are patterns in markets that occur over and over. They’re rhythms that you’ll see again and again when you’re looking at a market chart. By using these waves, you can discern an overall pattern to a market and make decisions about when to trade. One of these waves is known as a Wolfe Wave.
WHO FOUND THE WOLFE WAVE?
The Wolfe Wave was discovered by a trader named Bill Wolfe and introduced to the public in a 1995 book called Street Smarts by another trader, Linda Bradford Raschke. Wolfe’s idea was that waves financial markets act the same way that waves in the ocean do, and that you can use them to predict where a price is going to hit at a specific time in the future when you recognize the wave.
HOW DO YOU FIND THESE WAVES?
Wolfe Waves have a very specific pattern that can be identified. Once you see this pattern, you can use them to predict, based on where prices have been, where they’re going to end up when they fall into this Wolfe Wave rhythm.
IDENTIFYING WOLFE WAVES
Let’s talk about the bullish Wolfe Wave. This will tell you how it works, and you can simply reverse it for the bearish Wolfe Wave. Imagine a zig-zag on your chart made of five lines. The first two lines, from down to up to down, look like a triangle without a bottom on your chart. For a Wolfe Wave, the bottom point on that third line has to be below the bottom point of the line you started with. Now you can draw an imaginary line between the starting point and the bottom point of that second line, which should be angled downward. Now the third line in the zig-zag, that goes back up, won’t go as high as the first line went in a Wolfe Wave. You can now draw a second imaginary line between the top point of your first line and the top point of your third line, giving you an upside-down triangle. Now continue drawing those two imaginary lines until they meet each other. This point, where the trends converge, is known as the ETA or estimated time of arrival for your price. You can now draw a third imaginary line, from your starting point to the top of your third line, and then continue that line along until it ends directly above your ETA point. That point up there is known as the EPA, or estimated price at arrival. The fourth line in the zig-zag should actually end at or just below your bottom trend line - the first imaginary line you drew. That’s your entry point, because it’s where the wave is at the lowest, and right before it’s about to head to its highest point. If you’ve properly identified the Wolfe Wave, you should now see the price rise until it reaches the EPA at the ETA.
HOW IS THE WOLFE WAVE USEFUL
Any trader will tell you that there’s no magic bullet - these things aren’t set in stone. But it’s an extremely useful tool for getting an idea of where a price is going to go based on where it’s been. If you spot a Wolfe Wave forming, and you time it properly, you can enter and exit at optimal times to make a profit. The key is learning to identify the waves quickly - charts move fast, you really have to be on the ball to spot these trends accurately as they occur with enough time to get in on them.


