Alternative methodology for identifying Wolf waves

Dmitry Demidenko, trader, iLearney trainerIn the master class "Be a Trader with iLearney"

It is no secret that any market has a wave structure: bases alternate with tops, highs are replaced by lows, forming new waves. Many traders try to forecast future changes in quotations on the basis of various theories. And if the classical theory of waves does not interest anyone for a long time, the research Elliott и Wolfe is still on everyone's lips.

Perfect Wolf waves

Today I would like to talk about Wolf waves. The author of the concept is Bill Wolf, who described it in his book with the same name. In a general sense, the model is as follows:

Wolfe waves

As you can see from the figure, the configuration consists of five waves, with the end of the fourth wave giving the anticipated entry point, and the end used to determine the moment to close the position.

As a rule, the identification of the wave structure in the real market begins with the search for a significant price movement (wave 2) and the subsequent correction (wave 3), the end of which is indicated by point 4. In this case the greatest problem is the location of the extremum, which is the beginning of the entire configuration. According to the author's concept, it should be in the range of the fourth wave, i.e. for a bullish model it should be above point 3, but below point 4, for a bearish one - on the contrary.

However, it is not always possible to find a perfect maximum or minimum in the market that meets these conditions. As a result, some traders and stopped believing that waves should start from a pronounced extremum.

In my opinion, there are perfect Wolf waveswhich can be identified through a combination of the author's concept and the the principles of harmonious trading. To begin with, we need to change our view of the known configuration and assume that close attention should be paid not to finding the optimal point 1, but to the corrective movement - wave 3.

The fact is that the depth of the correction depends on the expected reversal area. According to the pattern AB=CD, if the pullback is located in the zone 61.8-78.6% from the initial movement, the change of the trend can occur when testing levels 127.2-161.8% by Fibonacci. Thus, knowing the depth of the correction, we can determine the probabilistic location of point 5.

How to use Wolf waves under the prism of harmonic trading

Wolf waves on the daily chart of GBP/USD

Wolf waves on the daily chart of GBP/USD

It follows from the chart that the corrective movement in the third Wolf wave ended early this year with the formation of point 4, which is located at the level of 78.6% from the initial downward movement AB (2-3). According to the basic principles of harmonic trading, the potential reversal zone should be at 127.2%. As a result, upon an unsuccessful test of this area, the downtrend was replaced by a bullish trend. That is, the pattern AB=CD made it possible to correctly identify the end of the fourth Wolf wave and determine the potential entry point into the market.

As a result, the location of the initial extremum of the configuration for supporters of the classical approach is beyond doubt - it becomes the minimum recorded in the middle of December. Adherents of the theory, according to which point 1 may not be an extremum, also get an opportunity to specify its search.

Wolf waves on the daily chart of GBP/USD

As can be seen from the figure, line 1-5 is used to identify point 1, which passes through point 3 and the Fibonacci projection of 127.2%. In this case, there are no particular differences in determining the configuration of the model, but in practice they can be quite significant. The fact is that the size of potential profit depends on the location of the initial extremum of the model.

In my opinion, it's not it is worth waiting until the chart touches the line 1-4 in order to close the position. In fact, the wave structure can end even earlier. In order to exit a trade, I prefer to use the point of intersection of the line 1-4 and the vertical line drawn from the bar at which the position should have been opened.

Wolf waves on the daily chart of GBP/USD

The above examples show that the joint use of Wolf waves and the principles of harmonic trading allows you to build a more reasonable work strategy. Of course, everything does not end with the AB=CD pattern. In particular, the application of the "Three Steps" and 5-0 models, which are the basis of the wave configuration, is interesting, which I plan to talk about in one of my next articles.

Now I would like to know traders' opinions on alternative methods of exiting a position using channels and Fibonacci projections as well as on the basis of time dependencies during formation of model extremums. Which method do you use and what do you think are the main advantages of it?

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