Step #1: Prior to the Bullish Wolfe Wave Formation look to have a clear Bearish Trend
Firstly, before the first wave to develop we need to have a clear trend that needs to be reversed. For high probability trades we want to see a prior bearish trend before the bullish wolfe wave develops.
This step is quite essential if you want to correctly trade the wolfe pattern.
Now that we’ve identified a trend is time to apply the wolfe wave rules to the price chart which brings us to the next step of our reversal strategy.
Step #2: Try finding a 5 wave move that can be contained in a channel. Last wave 5 must break below the channel
You can find the wolfe wave pattern rules few paragraphs above
A valid wolfe wave is composed of 5 waves that follow some simple rules. However, the most important rules are that wave 2 and 4 must be contained within the channel created by Wave 1 and Wave 2.
Secondly, wave 5 breaks below the trendline created by wave 1 and wave 3.
Step #3: Buy after we break and close inside the Price Channel.
At the moment when the price enters and closes back into the price channel, we want to enter a long position. We like to wait for the close inside in order to eliminate possible fake breakouts.
Note * If we don’t get a close back into the price channel we don’t have a valid trade signal.
Step #4: Draw a trendline that connects the wave 1 low and wave 4 high and extend it in the future. Take profit when the EPA line is hit.
The line that connects the wave 1 low and wave 4 high is called the wolfe wave EPA line.
The EPA line stands for Estimated Price at Arrival and it’s an effective take profit strategy. The EPA line main purpose is to show at what price the market will extend after it reversed the previous trend.
Step #5: Hide Protective Stop Loss below Wave 5
The protective stop loss can be located below the last wave or wave 5. This strategy gives us a very tight stop loss which is good for our risk management strategy.
Obviously that a break below wave 5 means we also break first below the channel and this will invalidate the validity of the wolfe wave chart pattern.