Trading Systems in 'New Concepts In Technical Trading Systems' by J. Welles Wilder

[chirules54]

Hey Dale.. how has your weekend been? I've been studying the SI and I think I have it down, I just had a few questions I wanted to ask just to confirm that my understanding is 100%...

1. When you enter initially (after above/below a significant swing point) the INITIAL SAR is the MOST RECENT swing point in the other direction, so if you are going short then the SAR is the most recent high swing point, correct?

2. After this, the SAR doesn't change until a new low swing point is made, which then makes the most recent high swing point the new SAR. This repeats itself every time a new low swing point is made, correct?

3. You don't use the trailing index SAR unless the ASI reverses on itself 60 points away from the most favorable ASI since you were in the trade. When you do this, the SAR becomes the most extreme price since the 60 point drop, which usually is going to be the high/low that occurred on the day that the ASI dropped by 60 points.

4. The SAR used is always the closest one calculated, so if you have a 60 point ASI change which triggers the trailing index sar, if the "standard" SAR calculated by the previous high/low swing point is still closer to the price, then you are still going to use that as the SAR regardless of the trailing sar being activated.

5. I was pretty sure about this one, but just to make sure: The SAR is if the price closes above/below that point, not if it simply hits that price sometime during the day.


Also, I was wondering what you did in a certain circumstance which seems to happen sometimes with the TBP system, I've having a bit of a dilemma. For example, I went short gold on wednesday night at about 938, and my target was 903 or 904 I think. The price went within a dollar of this target, but it ended the day at 918 or so. I was wondering if you would take the profit on this trade since it is favorable for you, and then just reopen the same position at the current price with the updated target, which is 906 I believe. I think this is a good idea because you are basically "locking in" these profits even though the target wasn't hit, but since you are reopening the same position you are still going for the target, so for example I would reopen the same position at 918, going for the target at 906. To me this seems like a good way to "insure" some profit on the trade without giving up any more potential profit since you are reopening at the current price and still going for the same target level you would be going for if you had never closed the original trade.

In other words: No matter what, if at the close of the day your TBP position is showing a profit, take it and then reopen the same position at the current market price going for the same target/stop loss that you normally would.

Anyway, hope this makes sense as I believe this may be a way to slightly improve the TBP system, and I look forward to your feedback..

-Nick

[dpaterso]

Hi Nick.

As far as the SI System goes you've 'got it down 1000%'. That's EXACTLY it. One thing that you will notice, however, is that the Trailing Index SAR is normally ALWAYS the closest SAR (definitely on forex pairs anyway) so don't get worried that you're always finding this. At first I thought it was a mistake on my part BUT I think it's got a lot AGAIN to do with the difference in quoted prices i.e. the 'PIPFACTOR'. As a matter of fact a lot of the time with forex pairs I find that I'm REALLY just trading the Trailing Index SAR not the Swing Points i.e. the Trailing Index SAR normally gives you a signal to stop and reverse LONG before a HSP or LSP is giving the signal. EXACTLY why this is I am not sure. You COULD trade the system WITHOUT USING the Trailing Index SAR i.e. ONLY trade the HSP's and LSP's BUT from what I've seen this keeps you out of LOADS and LOADS of highly profitable trades. On the other hand on the daily timeframe the HSP's and the LSP's are the more 'sure' signals. I really think it's got to do with the volatility that our market(s) has / have nowadays and the fact that things 'happen faster' than they did in 1978. It's the only explanation I can think of.

Also: that 'business' of placing an order 'a few ticks above or below the high or the low' does not work very well (not in todays markets anyway) (he uses 5 ticks or points or pips). I use 2 x the spread instead and this seems to work FAR better i.e. it 'adjusts' itself particular to the instrument being traded. In other words: it would suicidal to place an order 5 pips above or below the high or the low on a pair like GBP/ZAR for instance (the spread is 500 pips) because the order WILL ALWAYS get executed false entry or not. EUR/USD would be 6 pips normally. I'm certainly not advocating that you trade something like GBP/ZAR UNLESS you've got a LOT of money but suffice to say the system will work. Also: as I have stated previously: this system appears to generate FAR GREATER profits on the 1 hour timeframe (that's the minimum I reckon i.e. I tried 30 minutes and far too much 'market noise' so no point in testing anything less). I also use an additional little 'trick' for order placement i.e. I have a 7 period EMA of the (H+L+C)/3 (one of HIS 'favourite' formulae by the looks of things) and when I'm unsure about the entry then I check to see if the price has CLOSED above or below this EMA AND ONLY THEN will I place an order at 2 x the spread away from the high or the low. Yes, again, like every other 'addition' to any system, it keeps you out of some 'magnificent' trades BUT it also keeps you out of most bad ones (this is pretty much an 'offshoot' of that 'little system' that I described ealier to you AND if you use BOTH together you can add to positions as well i.e. if you're ALREADY in a SI System trade you add to your current position based on signals from the 'little system' that I described). Again: don't get me wrong i.e. the SI System works perfectly in its 'original' form BUT we are here to MAXIMISE profits are we not???

AND BY THE WAY: Capital mangement EVEN WITH THIS SYSTEM is crucial to your success. I have become EVEN MORE conservative than Wilder i.e. he says to NEVER MARGIN more than 60% of your capital at any one time (I now stick to 30%) and he says to NOT EVER margin more than 15% of your capital on a single instrument (position???) and I stick as close to 7.5% as I can get. You cannot BELIEVE the 'piece of mind' this gives you when you're trading. No stress and no possibility of overtrading etc. Remember that there WILL BE drawdowns with this system LIKE ANY OTHER AND you are not really using 'stops' AS SUCH with this system either i.e. your SAR points are actually your stops and sometimes these CAN be very far away (based on the HSP's and the LSP's anyway i.e. the Trailing Index SAR is normally VERY close as he quite correctly states in the book).

TBP System:

I never thought about it but I agree with you wholeheartedly BECAUSE if you're in a profit now and your TP has not been hit during the day then the TP is going to move almost always against you i.e. your TP today IF HIT would have generated MORE profit than leaving the same position open with a lower TP the next day which is normally what the system will give you (sometimes holding on to the position and adjusting the TP for the next day may even result in a loss).

[Bocajunior]

Thanks for your quick response Dale. Sure is interesting stuff working my way through the book.

I have a couple of questions on Section III though.

1, The book details how to calculate ATR. Is it not the case now that our brokers software package caculates this for us saving us a bit of work here? We can use the current ATR supplied by the broker?

2, If I understand it correctly, ATR x C (a number between 2.8 - 3.1) gives us our SAR point when added or subracted to the last SIC? This SAR point is only valid to a close so essentially, we would really be trading without Stops if using this system? Good discipline required me thinks.

Thanks and Regards
Boca

[dpaterso]

Hey Boca,

You ALSO have everything 1000% correct!!!

You are quite right i.e. MOST of the Volatility System's 'instructions' detail the method of calculating the TR and the ATR and YES most packages have it 'built in' (although I have learned to NOT trust what the broker gives me i.e. I now ALWAYS do a few manual calculations to ENSURE that the ATR I'm being given is correct)!!! So yes: to answer your question the ARC REALLY is just the ATR x the constant (whatever you choose to use).

Also: YES you are not using stops with this system and THAT is why I keep 'banging on' about the fact that this system (I think) is NOT for the 'feinthearted' or 'undercapitalized' of us i.e. the SAR moves AWAY from the price based on volatility and there is always the chance that the price could keep moving against you BUT IN SMALL INCREMENTS i.e. not enough to signal a stop and reverse and if this happens who knows where the bottom is??? I have NO DOUBT that with enough capital and patience this IS probably the 'top' system in the book BUT we all have to build our accounts up to a point where it is SAFE to use it I think. And with NONE of his systems does it help to add stops 'to the mix' i.e. you will almost always get stopped out for no good reason. I think the only system that uses a 'physical stop' is the TBP System. ALL the others are based on a stop and reverse for a 'stop' (the SI System does mention the fact that your initial stop is the last HSP or LSP BUT if you look closely THESE stops are usually so far away from the price that they're 'outta sight' AND the Trailing Index SAR WILL ALWAYS get 'hit' first anyway and, this is of course, a stop and reverse signal anyway).

[Bocajunior]

Again Dale, thanks for your comments and answers to the questions.

I agree with you about the uncertainty of this system as you would have to choose position sizes very carefully so that your risk would be managable.

Thanks
Boca

[chirules54]

Hi Dale, how's the trading this week going so far? So from your experience the SI is more effective on the 1 hour timeframe than the daily? I have 1 hour and 3 hour charts with oanda, I wonder if the 3 hour would be any good...
Also, I was wondering how that little system you created with the stop orders has been going.. I believe you said that you tried it with silver initially and got good results but that you were going to try it with some other instruments.. as for me, I have the spreadsheet for the SI completed and I am going to plug in the figures from the book in a little while to make sure everything is correct. I still have the aud/jpy volatility trade open, and last week I opened a long position with the usd/cad, it is currently down about 60 pips as it has retraced a bit but the volatility system is keeping me in the trade for the long run, gotta keep following it.

[dpaterso]

Hi,

My trades are not going too well this week so far because I have not done any trades this week so far!!! I've been too busy updating indicators and adding stuff to the GCI platform unfortuanately (but today it looks like I'll be able to concentrate on trading again)!!!

Timeframes:

I think the timeframe depends on the instrument being traded. For example: the Dow moves LOADS intraday and if you're only trading the daily timeframe then you miss these moves. On the other hand there may be other instruments that do NOT move this much intraday so there'd be little point in trading them on a short timeframe. See my point? Soybeans is a good example of this i.e. Soybeans very rarely moves 'up and down' during a single session i.e. most times the price is either up or it's down in a session so it makes little or no difference whether you're trading Soybeans on the daily timeframe or the 1 hour timeframe. See the difference? Of course trading the shorter timeframes limits the number of instruments you can follow at any one time i.e. if you're trying to follow too many instruments you simply just do not have time to update the ASI and place orders i.e. most times the price will have already moved past your order price by the time you get to placing the order EVEN WITH my 'Integrated SI System Indicator'!!! Just something to bear in mind of course.

I'm please to hear about the Volatility System trades. Keep us updated if you don't mind.

As far as the other 'little system' is concerned (it definitely needs a name for reference purposes) it seems to work on everything (and well I might add). The strange thing is that I seem to be coming up with REAL simple stuff lately i.e. the 'it's so simple it's too simple to have lasting merit' but still I have not come across 'the pitfall' as yet and believe me I keep looking for one!!! I'm currently demo trading it (yes me: demo trading would you believe) on various instruments and so far so good. When I'm happy I'll post some results.

[chirules54]

Hi Dale, just wanted to give a quick update on my volatility system trades. Still holding on to the original AUD/JPY trade, by the looks of the chart an obvious downtrend has been in place for several weeks now (the trade was entered 27 days ago) and the SAR point is getting closer and closer to the price, so a reversal may be coming up in the next week possibly. Right now it is at about +450 pips, it's been as high as +700 or so. USD/CAD was in the red a bit but is now approaching the entry price again, it is back above 1.0200 so far today. GBP/JPY is still a bit away from entry (long) but the decreased volatility in the last few days is bringing the SAR point closer, it was around 202.00 for today. Gold is VERY close to a short entry, which makes me a bit nervous since it has been in such a long uptrend for so long. Even using a multiplier of 3.0 (I normally use 2.8) it will be within a dollar or two of a short entry, we'll see what happens today.

Finally got around to testing my SI spreadsheet by using the figures from the book, and everything looks good. I think starting tomorrow I'm going to start following it and entering small trades with the following: gold, gbp/jpy, aud/jpy, and maybe usd/cad. I believe you said earlier that it seemed to work best with the 1 hour timeframe because of the increased volatility compared to the 1970s when the book was written... do you still feel this way? If so I may only follow gold and gbp/jpy because the constant data entry will make it harder to follow more instruments. Also, I was wondering: do you think that using more than one system at the same time on the same instrument is okay? Obviously gold is very high on the CSI and is a good instrument to trade, but do you think using the volatility system, the TBP, and SI is too much? I reckon that the TBP system is still okay because it is pretty much an intraday system and doesn't require a lot of directional movement to work well. If the SI is used on a 1hr timeframe it would appear to be a shorter term system too, and the volatility system an obviously longer-term system. Based on this, I don't see any harm in following all 3 at the same time, but if you get conflicting information among the systems you could have a problem.

How is the "simple little system" working out lately? Are you using a 1hr timeframe with that as well? Also, when you mentioned above a "filter" for the system as a 7 period ema of the H+L+C/3, was that for the "simple little system" or the SI? I am a bit confused as you were discussing both in that post and also combining them together in some way.

Anyway, I am enjoying my short break from school as it is giving me more time to spend on trading, next term is looking to be a bit more demanding as I am taking 3 finance classes, but we'll see how it goes.

Hope things are going well for you this week.

-Nick

[dpaterso]

Hi Nick,

Thanks for the info on the Volatility System trades. If those trades all close above or below the SAR will they all be profitable or will some of them stop and reverse at a loss? Just curious.

I'm still happy with the SI System on the 1 hour i.e. working well although I've been kinda 'messing around' with that 'little system' more lately to be honest not for any good reason i.e. just being me again!!! The ONLY problem I have with the SI System / 1 hour is the fact that it limits you to the number of instruments that you can 'track' i.e. you cannot have a whole long list of instruments that you want to trade AND have two or three trading accounts 'to boot' as it is just not physically possible to be able to check the Swing Index, place orders, remove orders, etc. etc. etc. because by the time you get to the 3rd or 4th instrument the price has normally already gone past your price. Add to this the Volatility System and the TBP System and I don't see how you're going to cope well BUT try it and see just don't overtrade is all (of course). As far as getting conflicting signals between the systems is concerned I'm not sure I'd worry too much about it i.e. they're all designed to work a different way so you may find that although all three are giving conflicting signals it does not necessarily mean that ANY of them are wrong.

I've traded Gold and Silver a little this week with not such spectacular results i.e. not as much movement as I would have expected on the 1 hour timeframe. I'm FAST starting to see why GBP/JPY is so popular i.e. because of it's volatility. For me (of course) nothing beats the indices but I have not done too much this week at all (to be honest I've got the flu and it's getting me down big time).

The 'simple little system' seems to work well but in the past day or two I've found that the strangest thing is that all it is doing really is 'mimmicking' the Swing Index System. Try it with both on a chart and you'll see. Sometimes the 'simple little system' will get you into the trade earlier and sometimes it will give you a false signal that will cause you to stop and reverse and take a small loss but the same thing happens with the Swing Index System whether you use the 'simple little system' as a filter or not. Basically after 'messing around' with it (both together) for the past day or two I'm starting to think that it's 'either / or' again i.e. no point in using them together and maybe just complicating things (which seems to have become my 'trading speciality' as if the Swing Index System is not complicated enough on its own for crying out aloud)!!! The main problem with BOTH is WHERE to place the orders. I thought the EMA thing would keep you away from those orders that get hit due to a spike but no matter what you do you're etither too far or too close or whatever. It does not matter how you 'slice it' i.e. it's just a fact of 'trading life' that orders are going to be hit due to spikes or whatever and this will result in a loss on the stop and reverse and there is no way around it.

[dpaterso]

While I'm on the subject of order placement here is another 'idea' that I've 'come up with' that MAY keep you out of bad trades i.e. orders getting executed and then the price immediately retraces on you and you end up (possibly) having to stop and reverse at a loss (for the Swing Index System):

Instead of placing your order immediately on the close WAIT for the price to TEST this level first. Wait for it to retrace for a bit and THEN place your order. This of course DOES have the drawback that your order price is hit and the price just continues to 'steam roll' it's way straight in your direction without stopping. Having said that: I'm seeing more and more often that when an order is 'bad' the price hits the order and immediately retraces and changes direction i.e. it does not hit the order, retrace, come back to the order price, and then retrace again. Basically from what I have been seeing very often in the past two or three days is that the order price gets tested and if the price then retraces it will either keep on going in the opposite direction OR if it gets back to your order price it then just keeps on going in your favour. Like I said: could be a 'double edged sword' i.e. you COULD very well miss a good trade BUT it sure looks like this little 'manoeuvre' will keep you out of a lot of 'false starts' as it were. Just a suggestion.