Wolfe Waves – Get in the Zone
ello traders and welcome to the wonderful world of Wolfe waves!
This thread is meant to be a place where newbies and/or experienced professionals can come together to share, learn, and encourage.
The rules are simple: Be respectful and professional. Anything less won’t be tolerated.
Before we get started, I would like to acknowledge Bill Wolfe, the founder of Wolfe wave analysis. I am grateful to have stumbled upon his work. A quick overview can be found here:
If you are a struggling trader, frustrated and ready to give up, or just an all out system hopping, account blowing, psychotic indicator junkie, then this strategy just might be the perfect antidote for your trading endeavors. Or, if you are a seasoned professional, this strategy might simply be a nice addition to your trading tool box. In either case, Wolfe wave analysis provides a mechanically simplistic method to enter a trade in the so called “sweet zone”. These trades have a high probability of success. In addition, the very nature of the Wolfe wave structure allows you to mitigate your risk through very well defined stop loss areas.
Just to clarify up front, I don’t claim to be a Wolfe wave guru. Most of what I have learned has come from pouring over 1000’s of charts for the past 6 months. There are a few free online resources, but other than regurgitating the basic wave structure along with a fleeting mention of the sweet zone, I haven’t seen any real discussion as to how you locate the best price to enter into the trade. Do you enter at the trend line break, half way into the sweet zone, at the bottom of the sweet zone, or do you wait for a clear reversal with some sort of confirmation tool? This is the paramount question I will try to answer.
The Sweet Zone
In my opinion the sweet zone is the most important part of the Wolfe wave trading strategy. It baffles me that traders rarely discuss this topic. Understanding the parameters of the sweet zone is paramount to getting the best possible entry price. Sweet zones can be anywhere from 3 to 300 pips depending on the steepness of the wave and/or the time frame being traded. So the question is, where do I enter the trade? What criteria should I use? What tools should I use? And where should my stop loss be placed? I’m glad you asked. These questions and more will be discussed in detail as we progress forward in our study.
Let me make an analogy that I find pertinent to this discussion. Hopefully most traders here are familiar with Major League baseball. In my opinion, trading in the sweet zone is very similar to a major league hitter when he gets into the batters box. If you talk to a professional baseball player about hitting, they will tell you that their main objective is to hit the ball hard. It doesn’t matter where the ball ends up or if they make an out, their goal is to hit the ball hard. How do you hit the ball hard. Well, you make sure you make contact on the “sweet” spot of the baseball bat. How do you do that?
Preparation and patience – Make sure your cleats are clean. Make sure your bat isn’t cracked. Make sure your gloves are in good condition. Make sure you know as much about the opposing pitcher as possible in advance. What kind of pitches does he throw? What is his “go to” pitch? What kind of release angle does he have? Side arm? Over the top? How has he pitched you in the past? What stage of the game are we in? Are there runners on base? Is he showing signs of exhaustion? Having considered all of those things, the hitter will try and “wait” for “his” pitch. By being prepared, patient and cognizant of all of the pertinent information around him, he is then in a good position to try and force the pitcher to throw a pitch that is right in his sweet zone. And when that happens, the odds will be stacked in his favor. You get the point I’m sure.
Do your due diligence and be patient. Let the price come into your sweet zone. Make sure your working area is prepared. Make sure your mind is prepared. Make sure you have mapped out all of your potential trades in advance. A hitter stepping into the batter’s box is the same as a trader who is monitoring price action as it approaches the sweet zone. If he isn’t prepared, he might not hit the ball very hard. In fact, he might even strike out. If we as traders aren’t prepared we may miss the sweet zone or worse yet, strike out altogether.
If a hitter makes contact with the sweet spot on the bat and makes an out, he may be disappointed, but he knows that he has done his job. Maybe he smacked a one hop sizzler only to see the second baseman make a spectacular diving play. Or maybe he hit a line drive right on the sweet spot that went directly towards the left fielder for and easy out. It doesn’t matter, he did his job, he hit the ball hard right on the sweet spot. He may be frustrated at that moment, but a true professional knows that eventually the hits will come, the runs score, the production will increase.
In the same way, a trader’s only objective is to “hit” the trade right on the sweet spot. Maybe the trade failed because of a surprise news event, or a low liquidity stop loss run. Maybe the trade failed for reasons we can’t explain. So be it, we can analyze what may have gone wrong and add that knowledge to our mental tool box for the next time we step into the batters box. As long as we poured every bit of due diligence and discipline into entering that trade at the best possible price within the sweet zone, then we have done our job. We know that over time the winners will come, the pips will pile up, the accounts will grow.
For ease of discussion the following acronyms will be used:
WW = WOLFE WAVE
CWW = CLASSIC WOLFE WAVE
PWW = PARALLEL WOLFE WAVE
AWW = ANTI WOLFE WAVE
I think it’s best to fully delve into the CWW structure first before discussing the PWW and the AWW. By the way, the AWW is something I made up threw trial and error. Technically, it isn’t a Wolfe wave. It may be some other wave, I don’t know. I just know it works.
I put this diagram together as a quick reference as to what constitutes a valid CWW.
Note: I use XABCD to describe the wave instead of the normal 12345. The reason being is that most traders are likely very familiar with the AB=CD concept and it is an important tool used here in determining the entry price for our trades.
Every good entry needs a good exit. Below is my mechanical exit strategy ( I like to divide my positions up into 3 equal parts). I use the X, C, and A points as my reference points for exit. It is likely that there will be an increase in price action at these points just based on the nature of S/R. I would actually be setting my TP levels 5-20 pips below these three levels based on the time frame. I am generally very conservative with my TP’s. I don’t want to set my TP right at the level only to see price reverse significantly without banking some pips.
Note: When price reaches TP #1 just shy of level X, then the SL’s for the two remaining positions are moved to BE.
Here is a list of indicators along with the template I use:
Please feel free to post your charts with any questions. I am here to learn just as much as you are. Maybe you have some good filters to share with us or different parameters when entering a trade. We are all in this together. My hope is that “iron will sharpen iron” and that the end result will be a growing group of seasoned Wolfe wave gurus.
WWs work on all pairs, time frames, and instruments. WWs are often the endpoints of other larger more complex harmonic structures. I have noticed that pairs and the market in general tend to go through harmonic phases. Set ups seem to be developing everywhere. Other times, price action looks like a gazelle running away from a cheetah.
Be especially careful when trading volatile pairs on smaller time frames. Trying to trade the GBP/NZD on a 5 minute time frame during low liquidity with a 5 pip spread isn’t very prudent. There are many set ups every day so there is no need to force a trade during these high risk scenarios.
Be mindful of news events. Active trades on smaller time frames are very susceptible to spikes and widening
When monitoring your active trade, be cognizant of any smaller WWs that are developing inside the bigger wave. These smaller waves could give you a clue that it is time to bag the pips and manually end your trade.
But most of all, make sure you are enjoying the chase. Trading is hard work and can be frustrating at times. For me, the best feeling in the world is stalking, executing, and then winning the trade. Trading is my job and I absolutely love to go to work!!
My name is Kurt. I am a 50 year single parent of a beautiful 5 year old girl. I am generally pressed for time but will do my best to respond to any questions, comments, or concerns. I spend a lot of time mentoring and volunteering at my daughter’s kindergarten class. I am also very much involved in ministry and the community at large. Trading has been a hard journey but a rewarding one. It was never about the money, it was always about the freedom. Trading has truly been a blessing in my life. Good luck to all who have the dream and thank you for participating in this thread.
“A problem is merely an opportunity to find a solution”
What follows are a couple of initial examples of CWW’s with accompanying explanations as to how I determined what would be the most prudent sweet zone entry price.