In this article, we present a modified indicator for Metatrader 4 that shows Wolfe wave patterns in price charts and in any time frame. This tool can be very useful since it automatically identifies these price formations and saves the time and work it takes to be watching many price charts for hours looking for these and other patterns.
As every experienced trader knows, the biggest problem with price patterns, especially with advanced ones such as Wolfe waves, is the identification of these formations in the chart. This task not only requires skill and experience to visually find these patterns, but also the trader has to spend hours in front of the computer, without any guarantee that he will find a good opportunity. In addition, only rarely is it possible to observe these patterns in their ideal form, they almost always present with some small variations that further complicate the identification.
Therefore, resources such as this custom indicator are very useful as they significantly facilitate the work of the trader.
How does the Wolfe wave indicator for MT4 work?
As we mentioned earlier, once this indicator is installed and activated, it shows bullish and bearish Wolfe wave patterns on the price chart and in any time frame.
Its main features are the following:
- It is a custom indicator developed for the Metatrader 4 platform (it does not work on other platforms).
- To use this indicator, the trader has to install it and attach it to the price chart of interest.
- It works in all MT4 time frames.
- It has practically no modifiable parameters so it is easy to use, even for beginner traders.
- This indicator shows the following:
- Points 1, 2, 3, and 4 of the pattern.
- It draws the trend lines 1-3 and 2-4 that form the pattern’s price channel.
- Point 5 (where the buy or sell position is opened) is where the price reaches the trend line opposite to point 4. Therefore, once point 4 is formed, you just have to wait for the price to reach that line There we opened the position.
- The indicator draws an extended line through points 1 and 4, which allows the EPA to be determined, that is, the theoretical price level to which the price should go if the market moves in our favor.
- It also shows the Wolfe wave formations produced in the past, which allows us to verify how accurate the indicator is and the result we would have had if we had followed his signs.
In the previous image, we see an H4 price chart of the currency pair CHF/JPY where this custom indicator was used, which found a bullish Wolfe wave. As we can see, the indicator shows points 1, 2, 3, and 4 and the movements between them (1-2, 2-3, and 3-4) are indicated by blue lines. It also traces the lines that pass through points 1-3 and 2-4 (yellow lines), which form the wedge-shaped channel. It is line 1-3 that we use to carry out the buy trade since we wait for the price to drop from point 4 to reach this line, where a buy position is opened. As we see here, the price reaches this line and almost immediately begins to rise (it only crosses it slightly), so we can say that we are facing an almost perfect Wolfe wave.
The red line that passes through points 1 and 4 indicates how far the price could go once it starts rising from point 5, on the 1-3-5 trend line of the bullish Wolfe wave. Here we see how the price almost reaches that line.
Of course, things do not always develop so simply, sometimes these patterns fail even though they meet all theoretical conditions.
Download and installation of the custom Wolfe wave indicator
You can download this indicator at no cost at the following link:
How to trade with the Wolfe wave indicator?
The basic trading rules with Wolfe wave patterns are quite simple and are described below:
- A buy position (bullish Wolfe wave) or sell position (bearish Wolfe wave) is opened, when the price reaches point 5 from point 4. Point 5 is where the price reaches lines 1-3.
- It is recommended to wait for a price reversal candle, as confirmation of a possible price trend change in point 5, to increase the reliability of the pattern signal.
- A pending buy stop order (buy positions) or sell stop order (sale positions) is placed in order to enter the market during the breakout of the maximum/minimum of the reversal candle.
- The position is closed once the price touches the red line that passes through points 1 and 4, which is used to define the EPA of the formation. However, sometimes the price actually moves in favor of the buy or sell signal but fails to reach this line, therefore a trailing stop can be used that follows the price and protects the profits obtained as the market moves in the trade direction. Another possibility is to use a stop loss and a take profit that have a risk:reward ratio of 1:2 or 1:3.