Wolfe Wave Trading

Let’s talk about this indicator. The Wolfe Wave Indicator can produce fairly accurate signals in non-trend markets and has an accuracy rate of 60-65%, so it deserves our attention.

 WOLFE WAVE - WHAT IS IT?

Waves are patterns in markets that repeat themselves. Their recurrence presents a rhythm that will be easy to recognize when looking at a market chart. These waves make it possible for you to determine the general pattern prevailing in the market and make the right timing decisions in your trading. The Wolfe Wave is one such wave.

HOW DID THE WOLFE WAVE COME ABOUT?

The eponymously named Wolfe Wave was discovered by Bill Wolfe, a trader. It first gained recognition upon being mentioned in Street Smarts, a book published by another trader, Linda Bradford Raschke, and Laurence Connors. Wolfe’s idea was that waves in the financial markets resemble real waves, and the rhythmic nature of these waves can shed light on where prices will go next if they follow the pattern.

HOW DO YOU UNCOVER THESE WAVES?

Wolfe Waves have a very specific pattern that lends itself to identification. Once this pattern is recognized, it can be used to predict where prices will head based on the historical performance of the waves.

IDENTIFYING WOLFE WAVES

Let’s discuss the bullish Wolfe Wave.

 wolfe wave bullish

 

 It is will tell give you an idea of how it works, and you can simply reverse it for a bearish Wolfe Wave.

 

 wolfe wave bearish

 Imagine a five-line zigzag on your chart. The first two lines resemble a bottomless triangle on the chart. For a Wolfe Wave, the bottom point on the third line has to be below the bottom point of the original line with which you started. Now you can draw an imaginary line between the starting point and the bottom point of that second line, with a downward angle. Now the third line that rises again won’t go as high as the first line went in the Wolfe Wave. 

A second imaginary line can be drawn between the top point of your first line and the top point of your third line, which produces an upside-down triangle. Continue drawing these two imaginary lines until they meet each other. This point of the convergence of trends is known as the estimated time of arrival (ETA) for your price.  You can now draw a third imaginary line, from the starting point to the top of the third line, and then continue that line until it ends directly above the ETA point. 

That point is known as the estimated price at arrival (EPA). The fourth line should end at or just below your bottom trend line, which is the first imaginary line you’ve drawn. This is your entry point – it’s where the wave is at its lowest and where it is located right before heading to its highest point, its apex. If you’ve correctly identified the Wolfe Wave, you should see the price go up until it reaches the EPA at the ETA.

Wolfe Waves must have the following characteristics:

Wolfe Waves 3-4 must stay within the channel created by waves 1-2
Wolfe Wave 1-2 equals waves 3-4 (there is a symmetry that is recognizable)
Wolfe Wave 4 is within the channel created by waves 1-2
There is time consistency between all the waves
Wolfe Wave 5 exceeds the trend line created by waves 1 and 3, and it is the entry point

The estimated price is the price along the trend line created by waves 1 and 4 (point 6).

 Our wolfe wave indicator

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Video about Wolfe waves

 

LONG-TERM STRATEGIES

I consider long-term strategies to be those that are aimed at 50 pips or more. This definition, however, is subject to some conditions. In my opinion, when developing a long-term trading strategy, a trader should analyze several time frames. Even the strongest signal sent by an indicator – say, on the m15 timeframe – will not lead to a price movement, because older time frames will have a disproportionate effect on the data. (“так как на старших таймфреймах будет перевешивать” – мой перевод в красном).

So let’s try to come up with a long-term strategy based on a standard indicator. A standard indicator is an indicator that is used in MT4. We will use RVI (10) without a signal line as our example.

 

Let’s start our analysis with the D1 (day) time frame.

long term strategies D1 timeframe

 We can identify the first point of the RVI indicator when its value is less than the previous one, and we create a horizontal line (the red line on the chart).

We move over to the H4 time frame and draw another line (the blue line on the chart) when its RVI value is less than the previous one.

 long term strategies H1 timeframe

We switch over to the H1 time frame . . .

long term strategies m15 timeframe

 

 . . . and we build a line (the green line on the chart) when the RVI value is greater than the last one before that. Why “greater”? Well, the idea behind this is that we find our point when there is a pullback from the beginning trend. This pullback is caused by traders who believe that the up trend has not yet stopped.

We move over to the M15 time frame:

long term strategies m15 timeframe

 

 e build a green line when the RVI value is – once again – less than the previous one. We assume that the turnaround of the indicator in m15 will lead to a turnaround in the H1 time frame and a strong downward trend. The divergence of the indicator confirms the signal.

 long term strategies

 

We see now that a strong downward trend has started, and the indicator is not entering the oversold zone. The strategy can be optimized by analyzing other time frames, applying other oscillators, or by choosing an oscillator period. It is also necessary to determine stop-loss levels and exit points. 

I trust that this example will inspire many traders to come up with their own ideas.

 

SHORT-TERM STRATEGIES

 

I tend to favor short-term strategies. If you go to a casino and make money, it is best to pocket the gains and leave. That is your only chance of keeping your windfall. If you don’t, the casino, which has deep pockets and the benefit of unlimited time on its side, will almost certainly beat you.

The same idea applies to short-term strategies. As soon as the market lets you make money off a few pips, you should close the position. At the same time, you have to understand that the smaller your profit objectives, the easier it is for the broker to eliminate your strategy, and the greater your profit objectives, the easier it is for the market to eliminate your strategy.

In all likelihood, the ideal solution is a combination of short-term, medium-term and long-term strategies.

 

Scalping strategies


The term “scalping” is, naturally enough, derived from the verb “to scalp”. The traditional and somewhat sinister definition of that verb denotes the act of removing the skin and hair from an enemy’s head. In the context of the forex market, day and local extrema are the heads. It is from these that traders engaging in scalping slice off their profits.

Advantages and Disadvantages of Forex Scalping

It is quite challenging to pursue an effective long-term scalping strategy. Although there are a number of established scalping methods in existence, every trader has his or her own approach, based on the trader’s unique use of indicators and oscillators, psyche, and conception of the market.

A scalping strategy is a simple strategy that aims to quickly open and close positions based on one- to five-minute charts. The principal objective is to make a profit large enough to pay for the spread and commission fees; if the profit is positive and satisfies the trader, the position is closed.

One of the characteristics of scalping is a large number of trades. A trader engaging in scalping can make anywhere between 30 and 1,000 trades in a single trading day. As a rule, scalping makes use of such graphic models as the tick chart, M1 (one minute) and M5 (five minutes).

As was said earlier, there are many scalping methods. The most popular ones include opening orders when the price bounces away from the consolidation level or from various channel lines, opening orders when there are breakouts in levels or channel lines, trading on momentum indicators, and trading on Level II volumes.

Let’s take a look at several strategies that will help you evaluate your own scalping strategy. This strategy can be built on a combination of methods.

Strategy 1. The price bounces away from the level of channels based on highs and lows.

After the end of a trading session in New York, we build a channel based on the existing highs and lows of several candlesticks on the M5 time frame and begin scalping from the channel borders before the beginning of the next trading session in London.

The strategy can be applied with the help of Bollinger Bands or the linear regression channel.

You also have to optimize the dimensions for each currency, i.e. the start and end time of trading, the stop-loss and take-profit levels, and the number of candlesticks to plot a channel.

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Videos About Forex Scalping Strategies

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Strategy 2. Level II Book Trading

Information concerning Level II volumes can be obtained through FIX API. It is a leading indicator for scalping.

What is Level II

Level II shows us the correlation between indications of interest on the part of buyers (the BID side) and indications of interest on the part of sellers (the ASK side). In the Level II window we can see the level of interest for various price levels as expressed by the buyers (on the left “Bid” side) and, conversely, by the sellers (the right “Ask” side). This is the dashboard that shows traders’ intentions to buy or sell and the market depth associated with the asset or security (i.e., the number of orders and the demand-supply dynamics).

We can also view the spread, which the difference between the buy orders and the sell orders.

Level II shows the market depth levels – that is, all the buyers and sellers who have placed their orders, including the prices and lot sizes for those orders.

 

 

An imbalance in the buy and sell order volume can suggest the future price trend. Also, the displayed orders can help correctly determine the stop-loss and take-profit level for the trader.

 

All types of scalping strategies require the following:

  • Good liquidity as provided by the broker
  • High (above average) but controllable volatility of the instrument
  • Accuracy and completeness of market quotes transmitted to the terminal
  • A broker with low spreads/commission fees
  • A high speed of order execution

 

Arbitrage

Several factors should be taken into account when developing an arbitrage strategy. The first and most important one is slippage.

What is Slippage?

As we’ve already discussed, slippage occurs when an order is filled at a price that is different from the price originally requested by the trader.

Slippage suffers from a bad reputation. In fact, slippage is natural and can work to a trader’s advantage. When an order is submitted to the broker or liquidity provider, it is filled at the best price currently available on the market. It can be above the requested price, but it can also be below, so you can lose as easily as you can gain.

Let’s translate that into numbers. Imagine that you want to establish a long USDJPY position. The current rate is 110, and you enter a buy order to capture that rate.

If the order is filled at 110, no slippage has occurred and your position is established at the desired price. If, in the meantime, the market has changed and the price is now 109.90, your order is filled at that price and the slippage has worked in your favor (you entered the position at a slightly lower rate). When slippage is to your advantage, it is referred to as “positive slippage”. If, on the other hand, the rate rises to 110.10 between the time you place the order and the time it is filled, you enter the position at a slightly higher rate and the slippage worked against you. When slippage works to your disadvantage, it is referred to as “negative slippage”.  

Why does slippage occur?

Slippage occurs due to the natural market imbalances between buyers and sellers. As one side can easily outweigh the other, even if only a little, the price is susceptible to constant fluctuations. If, for example, you enter an order to buy a certain asset, but there aren’t enough sellers to fill the entire order size at the prevailing market price, the broker or liquidity provider will tap into the next best price to fill your order, which will be slightly above the prevailing market price (negative slippage). This also works the other way (positive slippage).

Brokers can also create artificial slippage in order to put scalping or arbitrage strategies out of business, or in order to increase their profits.

Slippage can also be introduced by liquidity providers.

Can you control slippage?

It is possible to calibrate the amount of slippage you are willing to tolerate before you place an order. However, there is no guarantee that your entire order will get executed at the desired price.

The use of FOK and IOC orders gives you the possibility of controlling slippage in arbitrage strategies, but these order types cannot guarantee you that your orders will be executed by the broker. For that reason, every arbitrage strategy requires a measure of exactness when it comes to fine-tuning one’s settings. This makes it possible for the trader to calibrate the profit objectives inputted into the strategy as well as the acceptable slippage.

 Intervention on the part of the broker

Brokers do not encourage the use of arbitrage strategies. Such strategies are considered to be toxic, and a trader using a toxic strategy should be prepared to get hurt by the broker.

The broker might block the account and return your original deposit to you, pocketing the gains. Or the broker might change the terms of trading, i.e., add slippage to the arbitrage strategy. You should carefully monitor every trade and, should you see that the conditions of trading have changed, you should stop trading.

What can you do in the face of broker intervention? There are several techniques you can use:

  • Use other forex robots in your account for the first 3-4 weeks of your trading.
  • Use arbitrage in combination with other strategies.
  • Use limit orders if possible.

 

Latency Arbitrage (1-leg) Arbitrage Explanation

Latency arbitrage involves comparing quotes from a slower broker with a fast feed and opening orders with the slow broker once an arbitrage situation presents itself.

Some brokers offer quotes faster than other brokers. For example, LMAX may update its quotes as frequently as 100 times per second. It is true that your server will need to be cross-connected with LMAX’s server to get the benefit of its fast feed, but this is not an issue. There are several companies that offer servers in the same data centers (LD4) as LMAX and that are connected to the LMAX server (beeksfx is one such company). If you compare this fast feed to quotes provided by MT4 brokers, which are updated at a hundredth of the LMAX rate, it will become clear how and why arbitrage is possible.

Think of this type of arbitrage as a time machine. You are able to see the movement of the price shown by the faster broker a few milliseconds before the same price is relayed by the slower broker, and open an order in the direction of the movement with the slower broker.

The following is an example of a latency arbitrage situation:

The EURUSD price shown by a slow broker is 1.34560

The EURUSD price shown by a fast broker is 1.34570

If you place an order to buy EURUSD with the slow broker, a few milliseconds later the price shown by the lagging broker will catch up with the price of the fast broker, and you will have made a gross profit of 10 pips (before the applicable spread and commission fees).

Naturally, for this kind of transaction to make sense, the arbitrage strategy should be operating in a fully automated mode. Your server should be located as close to the slow broker as possible to avoid slippage.

Most brokers place their servers in London or New York. If your slow broker is located in London, the source of the fast feed and your server for hosting your strategy should also be located in London. Ideally, all should be in the same data center.

It is necessary to point out that the use of an arbitrage strategy is impossible on a home PC because the delays caused by your Internet connection will invalidate any arbitrage strategy. Our Latency (1-leg) Arbitrage software


 

Arbitrage and HF Trading Lessons

Introduction

Lesson1: Test your broker

Lesson2: Latency Arbitrage Trading

Lesson3: Trading on News

Lesson4: Latency Arbitrage GDAXI Trading

Lesson5: Hedge (2-legs) Arbitrage Trading

Lesson6: Hedge Arbitrage GDAXI Trading

Lesson7: High Frequency Trading

 


 

 Hedge (2-legs) Arbitrage

Hedge Arbitrage compares quotes between two brokers and opens orders simultaneously when a price difference is observed between the two brokers. The orders are placed with both brokers, but in opposite directions. Then, once the opposite price difference is detected, the software closes the positions. In this case, you need to have two accounts with two brokers.

What follows is an example of a hedge arbitrage situation.

The EURUSD price as shown by one broker is 1.34560

The EURUSD price as shown by another broker is 1.34570

It should be noted in the context of 2-legs arbitrage that price differences often arise not because one broker is slower than another, but because the brokers might be relying on different liquidity providers for their quotes.

Let’s go back to our example. We need to place an order to buy EURUSD with the first broker and a corresponding order to sell with the second one. Once the two orders have been entered, we wait until an opposite arbitrage situation takes shape.

The EURUSD price as shown by the first broker is now 1.34690

The EURUSD price as shown by the second broker is 1.34681

We close both of our orders.

We have therefore purchased EURUSD at the rate of 1.34560 through the first broker and closed it at 1.34690. Our gross profit is 130 pips (1.34690 - 1.34560 = 130 pips).

We sold EURUSD through the second broker at the rate of 1.34570 and closed the position at 1.34681, giving us a gross profit of 111 pips (1.34570 - 1.34681 = - 111 pips).

All in all, we earned 19 pips (130 - 111 = 19 pips), excluding commission fees and the spread.

For 2-legs arbitrage, you should also choose brokers that are in the same data center in order to avoid significant slippage when opening and closing positions. When trading through FIX API brokers, I would recommend you use FOK (Fill-or-Kill) orders, which allow you to manage slippage. Our Hedge (2-legs) arbitrage software

 

Hedge vs. Latency Arbitrage: Pros and Cons

 

Latency (1-leg) Arbitrage

Hedge (2-legs) Arbitrage

Pros:

Cons:

Pros:

Cons:

Only one account is required

 

It is more easy for the broker to identify arbitrage

 

It is possible to control slippage using limit (FOK) orders

Two accounts are required

A minimum deposit is required ($100)

 

 

It is possible to conceal your activity from the broker

A higher deposit is required 

 

Trading with DAX and other indices

DE30 is the trading symbol for the DAX, its underlying index. The DAX 30 is a stock market index comprised of thirty of the largest and most liquid companies trading on Germany’s Frankfurt Stock Exchange. BMW, Munich Re, Siemens and Deutsche Bank are some of the companies listed on the DAX 30. Xetra, an electronic system owned by Deutsche Börse, supplies the relevant data for the DAX 30.

When it comes to arbitrage trading, DE30 is used widely by traders. But there are a number of difficulties associated with trading with that symbol. The most significant one is that the DAX often shows differences in prices as reported by different brokers. Your trading system should account for these differences. The problem is that these differences tend to change over time, and traders have to constantly monitor the size of the difference and periodically adjust their trading systems in order to avoid placing orders based on false signals. Still, it is well worth it.

The same applies to trading with other indices.

 PSYCHOLOGY AND DISCIPLINE

There was a time when I did not pay much attention to this topic. However, the more time I spend interacting with traders, the more I realize that psychology and discipline are key factors in a trader’s success.

A common problem is that many of our clients often approach trading on the forex market as a form of gambling and tend to lose control. I can offer one example (one of the many). In order to start trading using latency arbitrage, we recommend that traders work with another trading system for the first three weeks of their trading. 60% of our clients do not follow this advice, simply because they can’t rein in their desire to start using arbitrage systems right away.

If you can’t follow a set of rules when trading, you’d be better off not trading at all. Or you can allot a small amount of money, the loss of which would be immaterial to you, and play with it as you would in a casino. It might even be entertaining. But it has nothing to do with forex trading. If you plan on making money by trading on the forex market, you have to have rules in place and you need to follow them religiously.

I can recommend the following main rules and recommendations:

  • Don’t set daily or monthly targets, and don’t try to attain them at all costs. The market can change and, if you made a return of 1% today instead of the two percent return that you had planned, do not try to catch up whatever the cost. You are bound to make a mistake and lose money.
  • Be philosophical about your losses. Don’t try to reverse them right away and turn them into gains if this requires making decisions that are not well-thought-out.
  • Avoid making decisions based on such traders’ comments that you might see on online forums. You should also avoid trading on the advice of others, especially on advice given by brokers.
  • If you have just lost a good trading opportunity and missed placing an order, don’t let it upset you. The market will offer you more opportunities.
  • Don’t succumb to panic spread by market analysts. For example, usually, when everyone predicts a collapse of the American economy and a subsequent fall in the US dollar, news comes out that confirms that the US economy is strengthening, and the dollar goes up.
  • Analyze thoroughly every losing trade of yours.