All of these strategies are based on setups that have a previous market reading context, with similar or higher importance than the pattern itself. So helped by Forex Academy traders, we recommend you learn to contextualize the market to always know in what situation we are.
That said, let’s see what this strategy is about and how we could apply it to actual market action.
A Wolfe Wave is an exhaustion wedge subdivided into five waves. When we have higher highs and lows, but the distance between them is fading, we will have the context for a possible trend completion. The same happens when the wedge occurs with decreasing lows and highs.
This type of wedges will always provide us with a concluding context, but if we also ponder the five waves, we will have a setup to enter the market. Let’s view it using examples to understand it more clearly.
In this example, we are watching the EURUSD pair in a 1-minute chart. We can observe how the price moves on an upward trend with higher highs and lows, but in its latest section, these waves are dampening. The wedge is drawn in red, and we see three rectangles in part of the roof. It is important to discern these three touches on the top, which on a wave count, would be 1, 3, and 5. On the bottom of the wedge, there are Wave 2 and Wave 4. One way to find targets is to join point 1 with 4.
Here there is another example. In this case, it’s the 1-hour AUDUSD pair. We see how the price moves on a bearish trend, and on its last section, we observe lower bottoms and tops drawing a wedge pattern, giving us a Wolfe Wave. It is essential to recognize the three touches at the bottom, corresponding to waves 1, 3, and 5. On its tops, we would find the end of Wave 2 and Wave 4.We remind you that this type of wedges shows the final phase of a trend.