EURUSD - Bullish Wolfe Wave

The hourly chart on EURUSD shows a bullish Wolfe Wave pattern being formed. Currently we are waiting for point 5 to be plotted in order to go long.

EURUSD - Bullish Wolfe Wave Pattern

I have also plotted the Median Line in order to give a bit more clarity for price reversal. Presently, price action is hovering close to the upper median line. Plotting the 55, 21 EMA's we see a buy set up that was last formed, thus hinting at an upcoming sell set up.

In regards to the median lines, what's interesting to note is that according to the current median line (sloping downwards) we don't get much clarity into price action. In other words, where do we short EURUSD (although it is not recommended, especially when against a bullish wolfe wave pattern).

EURUSD - Bullish Wolfe Wave, Median Line

The next ideal thing to do is to plot another median line that points upwards (which we generally use for our price targets, in relation to a bullish wolfe wave).

EURUSD - Bullish Wolfe Wave - Price Objectives

 From this new median line it is a bit more easier to notice. In other words, a short trade can be initiated based on a break of this new median line. The stops would then be the most recent previous peak at 1.34088

The target levels would be the price action along the TL1-3 followed by point 3 at 1.32966. I will continue following up on this trade and see how the median lines can help in identifying price reversals before hand.

Wolfe Wave and Median Lines - Example 2

In this second example, we'll take a look at the GBPUSD daily charts which is currently almost set up for a short position. I won't go into the details but simply touch upon the most important facts. Therefore, please make sure to read the previous article which gives insights into using Median lines with Wolfe Waves.

The chart below represents the daily chart for GBPUSD with the usual Wolfe waves being plotted. We notice that price managed to tread very close to the TL2-4 parallel and currently showing signs of reversal after making a new peak.

Wolfe Waves - Median Lines, GBPUSD, Daily Charts

For the trader, it might take a few more candles to validate their short positions. So now let's introduce the Median lines to see if it can tell us something more.

Wolfe Wave - Median Lines, GBPUSD - Entry/Stop Levels

After introducing the Median line we notice that the final peak made was quite close to the median line and the current candle that we see closed outside the median line. Thus, it would be wise to initiate a short position on the open of a new candle outside the Median line or to enter a few pips below the current candle's low.

The stops would be placed just above the recent peak. Thus our short trade entry for GBPUSD would look like this.

Entry @ 1.5525
Stops @ 1.5725

And finally, let's see look into the target levels. We must always remember that Median Lines do not in themselves give us absolute price levels but just a tool to alert us in case of an impending change in trend. Thus, at this point in time our price target would be the most obvious price point of 1.48117. As and when price starts to get closer to this level, we will then adjust our target levels accordingly.

From the above trade set up, we get a risk/reward ratio of over 3.5%.

Improving Wolfe Waves with Median Lines

Before I get into the details, let me first outline the problem. The issue with Wolfe Waves is that due to the use of trendlines, it can be complicated to identify the price points. Both in terms of trade entry, profit levels and stop losses. Usually, the sweet zone is often considered a good entry point with the EPA line as the target level. But the problem is that in order to wait for a definite confirmation, in most cases, either the trade is entered or exited a bit too early or too late. Where exactly on the EPA line can one book profits?

In case of an ideal wolfe wave where ETA and EPA is respected, the price targets are easy to identify, but that is not the case in real time trading, which brought me to using Median Lines alongside Wolfe Waves.

One might argue that using Median lines might be redundant. Sure... but let's explore this in detail.

Wolfe Waves are nothing but a pattern that is used to identify price reversals. Median lines do the same thing as well, where in the failure to reach the median line often results in a change in trend (could be either consolidation or indeed a trend reversal). Again, with Median lines, there is no definite price points to enter and exit trades.

So why use Median lines?

I feel that Median lines might give us the answer, or rather the first indication of a price failure (read as reversal). Thus, Median lines could potentially point us towards an early trend change and thus alert us for taking up a position.

So let's look at some examples. In this article, i'll introduce this concept in hindsight for Facebook stock and in upcoming articles, i'll touch upon this concept in real time as the Wolfe Wave is formed.

The first example is that of the Facebook stock on the daily charts.

Facebook, Daily Chart - Wolfe Waves

We have plotted a bullish Wolfe Wave. So, if we were to go long, what would our price point be? After price breaches the 1-3 TL, we have a very large price range from $26.19 through $22.99. Even though the TL2 -4 parallel line acts as a guide for us, there is still no clear region for entry. Furthermore, it is not always that price touches this parallel line and reversal could happen well within the sweet zone. During such times, waiting for a confirmation could result in a late entry while entering a trade too early could lead to whipsaws.

Let's now introduce Median lines into this existing Wolfe Waves to see if it is of any help.

Because we're looking at a bullish Wolfe Wave, we'll start our Median Line from Point 2 which forms the high, 3 which forms the low and 4 which forms the next peak. We get a downward sloping Median line which is in line with the bullish price move.

Facebook, Daily Chart - Wolfe Waves with Median Lines. Entry/Stops

Using Median Lines for Stops and Trade Entry

Firstly, we need to lookout for the lower Median line. A breach of the lower median line would give us an indication of a failure of the Wolfe Wave as a whole. In terms of improving our trade entry, we'll let the Median line indicate to us about a price reversal, which generally happens near the median line.

Putting this together, we now see that price breached the Wolfe Wave TL2-4 Parallel line, which by itself would have not indicated anything to us. By using Median lines, we are now aware that price was dangerously close to breaching the lower median line but stopped short and reversed to the Median line.

Because price moved back above the TL2-4 parallel line, we would be looking to enter at a new candle open above the median line, which would be at $24.11 with stops a few pips below the previous key low at $22.68. From this stops, it is clear that if stops were to be hit, it would indicate a further downtrend in the stock price.

Using Median Lines for Target Levels

Facebook, Daily Chart - Wolfe Waves with Median Lines.Price Targets

Staying with the same Median lines, we can then identify our first obvious price target as Point 2 Wolfe Wave, which is $32.51. So this long trade on Facebook would have been:

Entry @ $24.11
Stops @ $22.68
Target 1 @ $32.51

Thus giving us a risk/reward ratio of almost 1:6.

We could improve upon this by plotting another median line that would project this into the future along with the ETA line. A confluence of these two lines would be our next price target, which is $35, improving our risk/reward to 7.5

While this forms just our first example, its easy to see how Median Lines can prove to be a valuable addition to increasing the odds of improving trading with Wolfe Waves. I will cover more such examples in upcoming articles and hopefully catch a few failed trades as well which will give us more hints on improving this method.

I welcome all comments and thoughts on this approach.

Why Staples could be a potential BUY

With the recent massacre of Staples stock, look to any stock website and Staples shows a Strong SELL. But obviously. Looking from a purely technical perspective, the weekly chart on Staples gives a different view, with a great risk to reward potential. Let's take a look at how the technicals point to a possible BUY in Staples.

Staples - Weekly Chart

In the weekly chart below, let's start with Wolfe Waves. We see a bullish Wolfe Wave being formed, with all the four key points in the waves being formed. The fifth and the key wave pivot almost managed to respect the parallel trend line of 2 - 4.

After a bit of a bullish rise from the 'Sweet Zone' the recent drop in Staples looks more like just a temporary blip more than anything else.

What's interesting to note is that when the trendline, 2 - 4 is projected, we see that this extended trendline acted as a resistance against the most recent price action.

When we plot a temporary trendline against the trend, we see that this intermediary trendline was well respected twice and if current price action continues, we could very well see another test of this upward sloping trendline.

From the above, we can thus look to buying on this temporary dip, with stops in the region of $12 and a potential entry in the region of $13.5 through $14.

The Wolfe Waves, gives us a potential projection, upwards of $25, with the first target level being $23.5

What's up in August???

Nothing much really. EURUSD has been ranging.. GBPUSD is going higher and higher and I expect to see a big drop post BoE...

Off on vacation. Be back to resuming this blog in September.. till then