Follow Up - Wolfe Waves & Median Lines

This is a follow up post to the previous trade analysis using the Wolfe Wave/Median Lines methodology for the following trades:

EURUSD
GBPUSD

In this trade analysis, i'll also put in another trade which I didn't mention previously, which is the CADJPY. What makes me to bring out the CADJPY analysis is the Wolfe Wave Failure pattern which was identified earlier on with the help of median lines.

EURUSD - Trade Analysis

In the EURUSD, we were looking at a bullish Wolfe wave to go long. At the time of writing the trade analysis, we had the Wolfe wave point 4 that was formed, and thus waiting for the bearish run towards point 5 in order to initiate a long position.

In the chart below, the arrow shows the region where the bearish run towards marking point 5 started. It could have been ideal to short the pair at this point in time with the obvious price target at 1.32041 which was reached.

EURUSD - Wolfe Waves/Median Lines

The second arrow shows us how price was pretty much contained within the TL2-4 Parallel line.

Going long EURUSD???

From the above chart, now would be ideal to take a long position on EURUSD. But the question is what would be the price points and the targets. In order to find out our long entry, we'll plot a new median line with points 2, 3 and 4 from the Wolfe wave. However, the median line with the above reference points shows price action outside of the median line, which means that we need to adjust the median line.

EURUSD - Median Lines with 2, 3, 4 WW as reference points

So we look for the next relative high which is the next peak after the pont 4 on the chart and plot the new median line as shown in the chart below.

EURUSD - Manually adjusted Median Lines

From the above chart we can now ascertain our price targets. There are some important points to note however.

Conservative Approach: A long position is taken when price action moves out of the upper median line, thus giving us an entry price at 1.329 - 1.324, with stops at 1.32041. The price targets would be 1.340 and 1.345

Reasons: We take this conservative approach because we need a validation that the current bearish run is complete and thus the median line would tell us about a possible change in the short term trend.

Aggressive Approach: This long position would be initiated based off the assumption that the point 5 in Wolfe wave has been formed. It is risky but offers traders the chance to make more pips. From this perspective, our price entry point would be the region where the candle opens above the inner median line (1.322 - 1.324) with stops placed a few pips below 1.317 which was the lowest point. The price targets remains the same though.

Reasons: In the aggressive approach, we're entering the trade 50 pips ahead of the confirmation without getting any validity from the median lines about a change in trend.

GBPUSD - Trade in play

There isn't much to write about this trade as we took on the trade based off the daily charts. So far we are just a few pips away from our entry price in the positive.

GBPUSD - Bearish Wolfe Wave, Trade in play

Revisiting this trade, we can also identify new price targets which is 1.5247, 1.510 and finally 1.48117. I will update on this trade in a later post.

CADJPY - Wolfe Wave Price Failure

The CADJPY pair was showing a bearish wolfe wave on the 4-hour chart. At the time of analysis, we had point 4 being formed which meant a bullish run towards point 5 and preparing us to take on a short position from the sweet zone (in the region of 96.285 - 95.344).

We however notice a price failure and thus point 5 wasn't reached. While general convention states that it is not advisable to take a position from point 4 - 5, at times this strategy can prove to be quite profitable.

CADJPY - Wolfe Wave Price Failure

The median lines however indicated to us an early warning of price failure. As we can see from the chart, price was supposed to move up and then drop from point 5. We get an early indication though as you can see how price moved out of the median line thus telling us of a potential wolfe wave price failure.

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%.