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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Bullish Wolfe Wave

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 08/26/2016
18,395 -53.01 -0.3%
7,825 -43.49 -0.6%
667 -14.42 -2.1%
5,219 6.72 0.1%
2,169 -3.43 -0.2%
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5.6%
4.2%
15.4%
4.2%
6.1%
Tom's Targets    Overview: 08/12/2016
19,000 or 18,000 by 09/01/2016
8,275 or 7,500 by 09/01/2016
710 or 680 by 09/01/2016
5,300 or 5,000 by 09/01/2016
2,225 or 2,125 by 09/01/2016

Written by and copyright © 2005-2016 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

The bullish Wolfe wave is a variation of a falling wedge, developed by Bill Wolfe. This article discusses identification and how well the chart pattern works. It is based on Wolfe's description of the pattern and the charts that accompany his description. Revised May 8, 2013.

The bullish Wolfe Wave
Bullish Wolfe Wave

 

Important Bull Market Results for Bullish Wolfe Wave

Overall performance rank (1 is best): Not ranked
Break even failure rate: 15%
Average rise: 22%
Throwback rate: Not studied
Percentage meeting price target (The EPA line): 42%

The above numbers are based on thousands of perfect trades. See the glossary for definitions.

Bullish Wolfe Wave Identification Guidelines

Identification has many rules and should be followed in the order shown below. The picture to the right will help. The chart pattern will be a falling wedge dictated by the various turning points.

CharacteristicDiscussion
Point 2This point is any peak (minor high) on the chart.
Point 3This is the bottom of the hill formed by point 2.
Point 1*Wolfe describes the point this way: "The 1 point is the bottom prior to point 2 (top), that 3 has surpassed."
Point 4The is the top of the hill formed after point 3. Point 4 must be below the price of 2, otherwise lines 24 and 13 will not converge.
Point 5This is the bottom of the hill formed by point 4. It need not bottom on line 13.
Converging LinesLines 13 and 24, extended into the future, must converge. If they do not, then you do not have a Wolfe Wave.
Other RulesThere should not be another higher peak or lower valley between the various turning points 1 through 5. In other words, a peak higher than 4 should not appear between points 3 and 5 nor should a valley lower than 3 appear between points 2 and 4.
ID pic of Wolfe Wave
Turning Points

* I asked for Bill Wolfe's help on this since 17 of his charts showed seven of them not forming bottoms at point 1 (price was making a straight-line run or even a gap). I asked why his charts didn't match his text. His one sentence response: "When did you take my [$3,000] course?"

I decided to answer it myself and found that if point 1 is a minor low instead of a straight-line run, the pattern works slightly better. The numbers in this article are based on 1 being a turning point (minor low).

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Bullish Wolfe Wave Trading Tips

Reference the figure on the right.

Trading TacticExplanation
Sweet SpotDraw a line parallel to line 24 beginning at point 3 and extend it to 5. The difference between this line and point 5 is the sweet spot. I show that at A as a circle. According to Wolfe, when price is in this area, buy.
EPAWolfe calls this the Estimate Price at Arrival. It is the price where the stock touches line 14 extended into the future. If this line is too steep, obviously price won't reach it.
ETAThis is the Estimated Time of Arrival. The date converging lines 13 and 24, extended into the future, join to form the apex is called the ETA. Price should reach the EPA on this date (shown as a vertical line). This rarely works.
SellWolfe writes that he uses the EPA line as a sell signal. When price reaches the EPA line, sell.
ID pic of Wolfe Wave
Wolfe Wave Trading

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Bullish Wolfe Wave Trading Example

Wolfe wave trading example

The figure on the right shows an example of a bullish Wolfe wave.

Price bounces between the turning points, matching the identification guidelines. Extending lines 13 and 24 into the future show that they converge to join at the apex.

When price drops below line 13, it enters the sweet spot (forming point 5). Buy. Not shown is line 24 drawn parallel starting from point 3 to bracket the sweet spot.

Price recovers and touches the green EPA line. That is the sell signal.

Notice that price does not touch the intersection of the EPA and ETA lines like it's supposed to. That rarely happens, which is why it's better to sell when price touches the EPA line.

 

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Wolfe Wave Testing Methodology

I programmed my computer to automatically identify Wolfe wave patterns. To find peaks and valleys, I found all minor highs and lows within 3 days (3 days before to 3 days after, 7 days total). I used 2,679 stocks starting from January 1990 to April 2013 and found 4,839 Wolfe waves. Not all stocks covered the entire period. Excluded were potential patterns with a low price below $5 at the time the pattern formed.

I measured the move from the low at point 5 to the EPA line and to various end points, such as the ultimate high. I only accepted those patterns with point 5 bottoming within the sweet spot.

Those performance measures that include the ultimate high should be viewed as perfect trades. Entry is made at the low price at bottom 5 and riding it up until it peaks just before price tumbles at least 20%. That type of performance cannot be duplicated in real life. The numbers should only be used for comparison to other chart patterns using the same methodology.

Bullish Wolfe Wave Performance

Table 1: Wolfe Wave Performance
CriteriaResult
Number of patterns4,839
Number reaching the ultimate high34%
Number reaching the EPA line before being stopped out14%
Number stopped out (price falls below point 5)49%
Out of data3%
Total100%
Wolfe wave trading example

Table 1 shows how the pattern behaved. The figure on the right may also help. Please note that I did not filter the Wolfe wave patterns by heavy volume at point 5, the slope of the lines or most other considerations (like the price trend leading to the pattern). Wolfe hints that there are other criteria he uses to select better trading setups, so keep that in mind. Consider this the bare-bones setup.

The ultimate high is the highest high before price drops at least 20%. Thirty-four percent of 4,839 reached the ultimate high.

Another 14% were stopped out but touched the EPA line first before declining below the low at point 5, ending the search for the ultimate high. This tells a trader how dangerous it is to hold onto a stock for more gains once it reaches the EPA target.

Forty-nine percent were stopped out on their way to the ultimate high. Again, this happens when price turns at point 5, rises some, but then declines below the low at point 5.

The remaining three percent were stocks that ran out of data before hitting any of the other benchmarks.

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Bullish Wolfe Wave More Performance

Table 2: Wolfe Wave Performance
CriteriaResult
Number reaching the EPA line42%
Number climbing to point 235%
Number climbing to point 455%
Average rise to EPA line13%
Average gain to ultimate high22%
5% failure rate15%
Average time to reach EPA line15 days
Average time to reach ultimate high75 days
Wolfe wave trading example

Table 2 dices the statistics differently than in Table 1.

The number of Wolfe waves with price reaching the EPA line was 42%. This is a different measure than the one just discussed (where 14% reach the EPA line and then drop). This measure is the number of patterns that touched the EPA line on the way to the ultimate high. The ultimate high was not reached yet, nor was the stock stopped out before reaching the EPA line. Think of this as the measure rule for the Wolfe wave. It is the number of trades that reached the EPA line.

To put the performance into visual perspective, I measured how many patterns reached point 2 and 4 which the table shows. I also measured the move to the ultimate high. This measures from the low at point 5 to the high at the ultimate high (the highest high before price drops by at least 20%).

The 5% failure rate is a count of how many patterns see price rise by less than 5% from point 5 before dropping below the bottom of the pattern (that is, below point 5). The 15% rate I consider high since many other chart patterns have failure rates in the single digits.

The remaining lines in Table 1 detail how long it takes to reach the EPA line and the ultimate high. This is in calendar days, not price bars.

-- Thomas Bulkowski

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Written by and copyright © 2005-2016 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Do something unusual today. Pay a bill.