This indicator was developed by Bill Wolfe and for the past 10 years, he has been using it to trade on the S&P. It is considered to be part of the group of indicators used by swing traders. This movement creates a definite wave with valuable projecting capabilities
Wolf wave pattern consists of 5 alternating waves, which form a channel or an ascending/descending wedge. Trend lines fan out from the first point in the wave which is used for entry and exit points.
Where to place the Stop Loss
As the entry of the trade only starts once the price has crossed back into the wedge a stop can be placed just above point 5 on a bearish setup and below on a bullish setup. With a tight stop loss, this strategy can produce a very high risk to reward trades.
Anything to look out for?
I have found when trading this pattern that if you have two wolfe waves giving a very similar point 5 over two different time lengths, this provides a further confirmation. From my experience, this offers the highest probability the target will be met. On the first and below examples, you have a double confirmation for the first setup.
Counting Waves – Bearish Pattern
Bearish and Bullish Patterns
Counting Waves – Bullish Pattern