Wolfe Waves Indicator

1.1 Indicator Concept

The Wolfe Waves indicator is based on the theory developed by Bill Wolfe in the 1980s–1990s. He was a trader who focused on market geometry and the natural rhythm cycles of price.

Core idea: Price doesn’t move randomly; it forms symmetrical wave structures that reflect the equilibrium between supply and demand. When price reaches an equilibrium point, a sharp trend reversal may occur.

The Wolfe Waves pattern consists of 5 key pivot points (high–low–high–low–high, or the inverse), creating a geometric structure with self-balancing properties. When these 5 points appear and satisfy the geometric rules, the indicator projects:

• Bullish Wolfe Wave: price is compressing downward and is likely to bounce strongly from point 5
• Bearish Wolfe Wave: price is stretching upward and is likely to fall sharply from point 5

1.2 Indicator Features

On-chart components:

• Numeric labels 1 to 5: mark the 5 pivots (highs/lows) forming the Wolfe Wave. Label 5 includes “Bullish” or “Bearish” to denote the wave type.
  Role: helps traders recognize the structure and key locations.
• Four solid lines: connect points 1–2, 2–3, 3–4, 4–5 (green for Bullish, orange for Bearish).
  Role: draws the Wolfe shape so the pattern is visually clear.
• Dashed line: extended from point 1 through point 4 to project the target zone (EPA – Expected Price Arrival).
  Role: indicates take-profit (TP) when price reacts from point 5.
• Two dotted lines: extended from points 1–3 and 2–4 to aid geometric assessment.
  Role: provide extra information about slope and symmetry.
• All lines turn red: when the pattern is “invalidated” (price moves against expectations).
  Role: instant warning that the setup failed; exit or avoid entries.

Alerts:

• The indicator automatically detects when 5 pivots complete according to the geometry rules → a new pattern appears on the chart.
• When the pattern is invalidated (price breaks the opposite way) → lines turn red → visual alert.
• Note: The code does not include a built-in alert() function, but you can add alerts based on the appearance of label 5 or the red color state.

1.3 How to Use the Indicator

• Select Bullish or Bearish mode: depending on the direction you want to trade. Choose “Bullish” for long setups; choose “Bearish” for short setups.
• Wait for all 5 pivots: the indicator will automatically label 1 through 5 when a valid Wolfe structure is found.
• Enter near point 5:
  • For a Bullish Wave: wait for price to touch or approach point 5 (the 5th low) → place a BUY, targeting the EPA (dashed line).
  • For a Bearish Wave: wait for price to touch or approach point 5 (the 5th high) → place a SELL, targeting the EPA.
• Set take-profit (TP): at the dashed EPA line — the projected equilibrium area.
• Set stop loss (SL): beyond point 5 by a safe margin. For Bullish, SL below point 5; for Bearish, SL above point 5.
• Monitor line colors: if lines turn red → pattern failed → cut loss or do not enter.
• Combine with other tools: add momentum indicators, volume, or higher-timeframe analysis to increase confidence.

1.4 How the Indicator Works

Inputs & roles:

• sensetivity (default 10): pivot detection sensitivity. Lower values = more sensitive, more pivots (more noise). Higher values = slower, only major pivots.
  Role: controls pattern frequency — crucial for signal filtering.
• isbull: choose “Bullish” or “Bearish” — determines which wave type is searched.
  Role: aligns with your trading bias.
• bearCol and bullcol: display colors for each wave type (orange for Bearish, green for Bullish).
  Role: quick visual identification on chart.
• Price data (OHLC): high, low, close of each candle.
  Role: raw inputs for pivot calculations and invalidation checks.

Main logic blocks:

• Block 1 – Pivot (high/low) detection:
  Use ta.highest(len) and ta.lowest(len) to find the highest high and lowest low within the last len candles.
  When a new high/low is detected, store its bar index and value in the pivots array.
  Role: identifies turning points — the foundation of Wolfe waves.
• Block 2 – Wolfe wave validation:
  When the pivots array holds 5 points, check if they satisfy the geometry rules:
  • Bearish Wave: piv1 > piv2 < piv3 > piv1 and piv4 > piv2 and piv4 < piv1 and piv5 > piv3
  • Bullish Wave: piv1 < piv2 > piv4 and piv3 < piv1 and piv4 > piv1 and piv5 < piv3
  
  Role: filters random pivot structures, retaining only true Wolfe patterns.
• Block 3 – Drawing & projection:
  If conditions hold, the indicator:
  • Plots 5 numeric labels at pivot points
  • Draws 4 solid lines connecting 1–2–3–4–5
  • Computes the slope between points 1 and 4, extends it as the EPA (dashed) line
  • Adds two auxiliary dotted lines (1–3 and 2–4)
  
  Role: visualizes the pattern and provides clear price targets.
• Block 4 – Pattern invalidation:
  After plotting, the indicator tracks price over the next 15 candles:
  • For a Bullish Wave: if the high crosses under point 5 (ta.crossunder(high, top)) → invalidation
  • For a Bearish Wave: if the low crosses above point 5 (ta.crossover(low, top)) → invalidation
  • On invalidation → all lines turn red, labels are removed
  
  Role: warns of failure, aiding risk management.

Outputs mapped to display & usage:

• Five numeric labels: show the 5 pivot locations → help identify structure and the entry (point 5).
• Four solid lines: draw the Wolfe shape → visual confirmation of the forming pattern.
• EPA (dashed) line: target projection → place take-profit (TP).
• Two dotted lines: geometric aids → improve confidence when assessing symmetry.
• Red color state: failure warning → exit or avoid trading.