We study the trading strategy for working on the popular Wolfe Wave pattern
We continue to disassemble forex trading systems. The basis of any forex trading strategy for technical analysis is the principle of extrapolation: what happened once may never happen again, but what happened twice will certainly happen in the third. N When trading in the forex market a trader needs to look at the graphs familiar patterns in the hope that they will work now. Of course, no one will give you any 100% guarantees, but the high probability of working out patterns in the past, multiplied by the ability to effectively manage capital, opens the way to impressive results. However, the identification of the model alone is not enough. It is important to build a competent strategy on its basis.
In the previous article, we learned how to find the Wolfe Wave model on charts, it’s time to get the pattern to work for us. Any trading system includes four elements: input, setting a protective stop order, determining a target and controlling a position. At the same time, the opening of longs according to the “bullish” model or shorts according to the “bearish” one in the financial markets takes place within the framework of the previously described trial or climax strategies. Let me remind you, the first system tries to catch falling daggers, the second involves a more cautious approach.
The entrance to the samples in the case of the Wolfe Wave trading system is the use of the suite zone described by the author. It is built by moving the line 2-4 to point 3. An educated triangle is a place for the creativity of traders. A position can be opened at the moment of quotes returning within the limits of the traded pattern. In the GBP / USD example, the buy order is set at the resistance breakout level in the form of line 1-3, the stop order is placed at the bar minimum at point 5. The beginning trader does not need to forget that in relation to the samples the protective stops are narrow, and the entrance to the transaction can be performed several times in a row as the stop is worked out.
Trading by climax implies the presence of additional signals confirming the reversal. This may be the “Head and Shoulders” pattern (or any other counter-trend trading models) as is the case with GBP / USD, and a breakthrough of trend lines acting as diagonal resistances or supports. The exit of quotes of a currency pair beyond the trading channel is a serious signal in itself and coupled with the “Wolfe Waves” pattern, it is a good reason for forming positions. The protective stop order in the first case (a combination of patterns) is placed below the bar minimum at point 5, in the second (a combination of the model and trend lines) – in the area of the correction minimum. It should be noted that trading in Wolfe Waves does not exclude the possibility of increasing positions, including through the joint use of samples and climaxes.
The classical approach assumes exit from the transaction when quotes reach the currency pair of lines 1-4. However, a perpendicular projection drawn to wave 1-4 from point 5 can be used. It will provide an intermediate target, which is achieved much more often than the previously announced target. Using projection allows you to customize the position management process. So, for example, subject to its achievement, a trader can:
- completely close the position,
- transfer the protective stop order to the breakeven point,
- fix part of the profit and transfer the protective stop order to the breakeven point.
Thus, the “Wolfe Waves” pattern represents ready-made solutions that allow transferring past patterns into the future and trading based on extrapolation. Simply put, this is a classic price action model, a trading system without indicators. However, as we said in relation to other patterns, no one will punish you if you use a filter system.