Trading Wolfe Waves

According to Ralph Nelson Elliott, the market has a wave structure and is subject to certain pendular movements. Many other researchers agree with him and, like Bill Wolfe, some of them have developed their own wave theories.

The success rate of this trading strategy is high, but learning Wolfe waves can be quite complex, so this strategy is not recommended for traders who are just starting out.

Wolfe waves are used to predict price direction. They form a price action model that consists of 5 waves that oscillate to find an equilibrium price. They can develop in any timespan, from the 1 minute chart to the monthly chart.

Wolfe waves


Rules and structure of the Wolfe Waves models

The 3 typical configurations where you will encounter Wolfe waves are as follows:

  • A channel in an uptrend (for a bearish Wolfe Wave),
  • A channel in a downtrend (for a bullish Wolfe Wave),
  • A horizontal channel when prices are consolidating.

To be considered a Wolfe wave, the following rules must be respected:

  • Points 3-4 must remain in the channel created by points 1-2,
  • Waves 1-2 and 3-4 are symmetrical,
  • Point 4 is in the channel created by points 1-2,
  • There is a steady time interval between each of the waves,
  • Wave 5 goes beyond the trend line created by points 1-3 and is the entry point.

When a turnaround materialises at point 5, you can sell on a bullish Wolfe pattern or buy if a bearish Wolfe pattern appears. The line created from points 1 and 4 gives the profit target.

Wolfe Waves ETA / EPA

The line that connects points 1 and 4 shows the EPA (Estimated Price at Arrival), the forecasted price on arrival. When it is very steep, the price is less likely to reach it.

The convergence of lines 1-3 and 2-4 shows us the ETA (Estimated Time of Arrival), the forecasted time until the EPA line is reached. In theory, the price should reach the EPA by this time or date, but in practice it rarely works.


Example of how to trade a Wolfe wave

Once the price goes back from point 4 to the trend line that connects points 1 and 3, take a short position when the next candle starts forming.

Wolfe Wave trading example

The Stop Loss is placed a few pips over the new 1-3-5 trend line.

The Take Profit is set by the EPA, which is the end point of a line drawn from points 1 and 4 and pursued in the future, in search of a vertical alignment with the ETA which is the point of convergence of lines 1-3-5 and 2-4.


Wolfe Wave success statistics

CriteriaResultsWolfe Wave
Number of patterns6.269
Percentage reaching the ultimate peak 35%
Percentage reaching the EPA line before being stopped 15%
Percentage of Stop Outs (price falls below point 5) 49%
Missing data 1%

Table 1 shows the behaviour of the model. Please note that Wolfe's waves are not filtered according to the volumes at point 5, the slope of the lines or any other considerations (like the trend of prices leading to the model). Wolfe suggests that there are other criteria he uses to choose the best trading configurations.

The ultimate high peak is the highest point before prices fall by at least 20%. 35% of the 6,269 patterns that were analysed reached the ultimate peak.

15% were stopped out, but hit the EPA line first before falling below the lowest at point 5. This indicates how dangerous it is to maintain a position for more profits once it has reached the EPA goal.

49% of the positions were stopped out as they headed for the ultimate high. This happens when the price arrives at point 5, increases a bit, and then goes back down below point 5.

1% of the data is missing because the price was out of data before reaching any of the other benchmarks.

CriteriaResultsWolfe Waves
Percentage reaching the EPA line 41%
Percentage reaching point 2 36%
Percentage reaching point 4 56%
5% failure rate 16%
Average time needed to reach the EPA line 14 days
Average time needed to reach the ultimate high81 days

Table 2 breaks down the statistics differently. 41% of Wolfe's waves reached the EPA line. This is a different measure than the one in Table 1 where 15% reached the EPA line. This measurement shows the number of patterns that hit the EPA line on the way to the ultimate high. The ultimate high was not reached, and the position was not stopped before reaching the EPA line.

To put the performance in visual perspective, you can see the percentage of patterns that reached points 2 and 4.

The 5% failure rate is a count of the number of models that see prices increase by less than 5% from point 5 before they fall below point 5.

The remaining rows in Table 2 indicate the time it takes to reach the EPA line and the ultimate high. (in calendar days and not in price bars).