A New Approach to Wolfe Wave Trading

May 17, 2017 13:45


Dear traders,

In my first Wolfe Wave blog we talked about the practical usage of Wolfe Waves in the Forex market and the break of the 1-3 trend line entry. Today I will show you new techniques based on a combination of the ATR indicator and Fibonacci Expansion. One of the single most important things I use while trading the currency market is "confluence".

In the analytical section of Admiral Markets' website you will always see the term "POC" for the technical analysis I do each day. It stands for the "Point Of Confluence" and it marks the zone where the price is expected to react.

The Power Of Confluence

Trading with confluence can give you the increased edge that you need to succeed in the foreign exchange market. Technical analysis in Forex is the study of using past price action to forecast future directional movement of a currency pair.

So, if you use a single technical analysis tool which has, for instance, a 55% accuracy rate of predicting the price movement, and then, apply a second, non-correlated technical analysis tool to filter your decision further, then you could increase your odds of predicting correctly by up to 65-70%.

I always make trades in the zones (POC) where I expect the price to react. My POC zone is the confluence of all important price action technical tools, including extremely important historical vs. now moment concept.

I'm personally very confident in my trading methods, and you can always catch me hosting live trading webinars on our website.

The Power of Confluence In Wolfe Wave Trading

Confluence can be a powerful ally, let's take a look at some of its features and advantages when utilising a Wolfe Wave trading system.

ATR with Historical Support and Resistance Confluence

According to the original rule imposed by Bill Wolfe, the 5 point is the top after the 4 point and is likely to exceed the extended trend line of 1 to 3. This is the entry point for a ride to the EPA line (target) 1 to 4. Sometimes, when the price is in a strong trend, point 5 can extend, making our entry not viable at all. That's why I apply the ATR Pivot indicator that plots extreme price levels on the chart.

When I notice that price is close to historical support or resistance and ATR is high or low, I usually look for an entry. There are many Wolfe Wave indicators for the MetaTrader 4 platform out there, but before you use them be sure to check the main rules of Wolfe Wave charting.

In this example, we can see how the price is pulled magnetically towards the POC made from ATR high and Point 5 of the Wolfe Wave. As soon as the price enters the zone, we can enter the market, placing our stops above the resistance zone.

In the example above we would sell when the price hits point 5 because we had historical resistance and ATR pivot (blue) as a confluence. Subsequently the price went to 1-4 EPA (target) level. Stops would have gone above the ATR high (dotted blue).

For this principle it is vital that your ATR indicator can accurately measure the projection high and low. In my opinion, the ATR is one of the best range predicting indicators, so it makes for a great asset to confluence charting.

Fibonacci Extension Confluence

What if the trendline 1-3 is broken and the price gets above point 5 and the ATR projection high. That means the trend is very strong and to counter it I use a Fibonacci extension. The Fibonacci extension should be plotted from point 2 to point 3, where the last part of the Fibo extension should be parallel with point 3. Entries are made on 50.0 or 61.8 Fib extension. The target is 1-3 line.

Point 5 is broken and the trend goes on. We place a fibonacci extension and enter at 50.0 or 61.8. Aggressive stops are below 61.8 fib, while conservative stops go below 88.6 or 100.0 fib extension. You can see this in the .gif below.

Forex trading is a never ending journey. Things that worked 10-15 years ago might not work today, as market conditions are in constant flux. Things are more volatile now and we should always need to adapt the current market conditions.

Luckily enough, you have myself and Chris to guide you through this wonderful business! We will always update you on new things related to trading through our live webinars.

Trade safe and don't forget to keep your risk in check. Always.



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