A cursory glance at the Wolfe Wave may look subjective and Bill Wolfe claims otherwise after a student has taken his course, the basic price pattern for the bullish Wolfe Wave is:
- Points 1 and 3 form lower lows.
- Points 2 and 4 form lower highs.
- When price forms Point 5, it will slightly exceed the trendline drawn (red line on the chart below) from Point 1 and 3.
- The trendline from Points 2 and 4 (red line on the chart below) will converge (red dot) with the trendline from Points 1 and 3.
- The trendline drawn from Points 1 and 4 (dotted line on the chart below) projects where price will likely go.
- Entry is typically around Point 5 of the Wolfe Wave.
Combining Wolfe Wave with OTM Binaries
The mini Russell 2000 has formed a potential Bullish Wolfe Wave on the Weekly chart. Points 1, 2, 3, and 4 have formed. Although typically traders wait for Point 5 to form, using OTM binaries, which lowers your risk on entry, makes trading Point 4 profitable, as well. Since the underlying is the mini Russell 2000, the binary option to use is the US SmallCap 2000.
Since the Bullish Wolfe Wave has formed on a Weekly timeframe, this one pattern could provide multiple trading opportunities. For example, on Monday morning a strike price at 1074 with a daily expiration on the US SmallCap 2000, was available for only $24.25 in risk. By 11:03 am New York time, the binary option realized a profit of $55.25 (excluding exchange fees). (Although if the trader held until expiration, the binary option expired worthless, 1074.6.)
Additionally, a Weekly Binary Option at the 1061 strike price was available on the US SmallCap 2000 with a risk of only $22.75 (excluding exchange fees). The Weekly binary does not expire until Friday at 4:15 pm New York time so if the market continues down (currently trading at 1076.50), more likely than not, the trader can bank profits prior to Friday afternoon.
Plus, since this is a weekly pattern, the trader could trade in anticipation of Point 5 developing for the next few weeks. Then, if Point 5 does develop, there will be multiple trade opportunities for several additional weeks for the upside move (to the dotted line). In other words, using the Wolfe Wave with OTM binaries can generate longer term trades (using daily and weekly options) for the next couple of months.