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

[chirules54]

Hi Dale, glad I was able to help. I would say that so far, the volatility system is great. The only thing I don't like about it is (obviously) the wide stop and reverse signals. Of my three open VS trades, only one would be in profit if it hit the sar (aud/jpy) and it would end up only being about +90 pips. On the other hand, the wide sar will keep you in the right direction, just looking back at past examples (like you mentioned earlier the huge move in eur/usd it would have kept you in) so I guess you could say it's a "love/hate" feeling.

I'm thinking about using a similar strategy to what I am doing with the TBP system, where I take profit (if the trade is showing a positive gain) and re-enter at the current price at the close every day regardless if my target was hit or not. To apply this to the volatility system, I was thinking about taking profits at every 100 or 200 pips or something like that. If you ask me, if "the man" had access to the markets at his fingertips and could execute trades in a split-second over the internet, I think something like this would be incorporated into his systems. I remember reading somewhere that 30 or 40 years ago the spreads in the forex market were like 50 or 100 pips on a pair and to execute trades you had to call your broker and pay some sort of commission, as opposed to now where everything is instantaneous and you have so much more information and technology. This also could explain why all of his systems are based on daily timeframes, because of the time and costs required in the 1970s to open positions, get the market data, and compute the values of everything in the systems. Imagine trading to do intraday trading without a computer in the 1970s.. it would be nearly impossible.

Thanks for helping me out on the limit stuff.. maybe I just didn't look hard enough on the cbot website for the information, I will take another look tomorrow.

Also, thanks for working with GCI to allow us to open accounts. After hearing your input on the matter about how you recommend $5,000 to trade the commodities and indices, it made me think and I may stick to forex pairs and gold for a little while longer. I was wondering though: can you trade forex and the commodities and indices from the same account? If so, I may just switch to GCI and trade forex for now, and start with the commodities in limited amounts as I add to my account.

-Nick

[dpaterso]

Hello,

Pleasure for everything.

I must say that you make some interesting points about Wilder and those years i.e. I have not actually thought about that either i.e. what WOULD Wilder have done had he HAD the tools that we have today at our disposal. Certainly something to think about. (Sometimes I feel terrible when I post something like this i.e. it almost comes across like the man is dead. Well he is NOT dead BUT he / they do not want to provide support on the book i.e. he / they did help me out once or twice last year but made it very clear that the book and the systems therein are sold 'as is' and no support is offered OTHERWISE believe me I'd have asked him ALL of these questions myself)!!!

If you open a CFD account i.e. access to stocks, commodities, indices, gold, silver, and forex pairs then the forex pairs that you have available to you to trade on this account will ONLY be the major pairs and a few crosses but I think this is OK i.e. these are the only forex pairs I'm trading (even at Delta) for clients anyway SO you CAN open an account at GCI under this little 'arrangement' and have access to THOSE forex pairs. You just need to let me know if and when you want to do this so that I can open the 'deposit account' and transfer the money. Once that's done then you just go ahead as 'normal'.

Look: I am NOT trying to scare anyone off from GCI and the instruments that they have on offer i.e. the problem is WHAT you trade and HOW MUCH OF IT you trade and like I said before: I've seen a single $50 lot at 200:1 leverage turn to a loss of more than $400 in a morning!!! I suppose what I'm saying is this: trading those things requires a lot of 'respect' i.e. it's not like trading something like EUR/USD where you can afford to 'mess up' or miss a stop and reverse signal now and then and NOT wipe your account out ESPECIALLY on the longer timeframes and, admittedly, at the time of this 'Soybean crisis' I was trading ONLY the daily charts so by the time you find out you're 'wrong' and in a 'bad trade' it's too late i.e. only the next day or at the close today do you find this out and by then you're down the $400. That's where there is a big difference.

Anyway: whatever you decide is good for me; just keep me posted if you need me to do anything.

[dpaterso]

Further to this GCI 'story':

It's been 'bugging' me this leverage 'thing'.

I have not been able to make sense of the fact that by DECREASING the leverage all you are really doing is INCREASING the amount of margin required to open a position. Right up until today I was under the impression that by DECREASING the leverage you were protecting yourself in some way by REDUCING the value of a single tick / point / pip movement and that INCREASING the leverage was a 'bad thing'. What I can't 'fathom' is if you are staying within your (Wilder's) money management rules then it WOULD APPEAR that INCREASING the leverage makes it EASIER to 'stick' to those rules. Let me explain:

(All the examples below refer to GCI accounts):

On the default 200:1 leveraged accounts:

EUR/USD - 1 single mini lot - $50 margin cost.
Value per single pip movement - $1.

So let's say that the starting capital in this account is $500 then this means that in the above case you are using 10% of your capital on a single lot (which is within Wilder's rules) and you are margining 10% of your total capital (which is also within Wilder's rules).

NOW: as it has been explained to me by GCI Admin:

INCREASING the leverage to 400:1:

EUR/USD - 1 single mini lot - $25 margin cost.
Value per single pip movement - $1.

So let's say that the starting capital in this account is $500 then this means that in the above case you are using 5% of your capital on a single lot (which is within Wilder's rules) and you are margining 5% of your total capital (which is also within Wilder's rules).

DECREASING the leverage to 100:1:

EUR/USD - 1 single mini lot - $100 margin cost.
Value per single pip movement - $1.

So let's say that the starting capital in this account is $500 then this means that in the above case you are using 20% of your capital on a single lot (which is now AGAINST Wilder's rules) and you are margining 20% of your total capital (which is still within Wilder's rules).

DECREASING the leverage to 50:1:

EUR/USD - 1 single mini lot - $200 margin cost.
Value per single pip movement - $1.

So let's say that the starting capital in this account is $500 then this means that in the above case you are using 40% of your capital on a single lot (which is ALSO against Wilder's rules) and you are margining 40% of your total capital (which is NOW against Wilder's rules).

Can you see the difference and what I'm trying to say???

OK: it's of no consequence WHOSE money management rules you are following (I'm just using Wilder's in the examples because I use a conservative derivative of his rules) it would appear that all a higher leverage setting is going to do is 'screw' you IF you don't stick to and within a decent set of money management rules BUT it does NOT change the tick / point / pip values at all which is NOT what I've been led to believe after all this time UNLESS I am STILL not understanding this and GCI is confusing me!!!

On the other hand: remember that a single lot of the Dow at Deltastock costs you $632.95 of margin per lot (50% of the Dow's current point value) because at Delta you trade the indices on 5% margin BUT the tick / point value is $1. At GCI (with the 'default' 200:1 leverage) a single mini lot of the Dow Futures costs you $50 of margin per lot and the tick / point value IS STILL $1 because at GCI you trade the indices on 0.5% margin which is roughly equal to 200:1 leverage. If the leverage is INCREASED at GCI to 400:1 then the same single mini lot of the Dow Futures would cost you $25 per mini lot and the tick / point value IS STILL $1 so where is the 400:1 MORE RISKY than the 200:1 or 100:1 or 50:1??? Based on MY understanding of the above it would seem that the LOWER the leverage the more risk involved i.e. at GCI with with 50:1 leverage you'd be 'laying out' $200 to buy a single lot of the Dow Futures to make $1 per tick / point movement but at 400:1 you're only 'laying out' $25 to make the same $1 per tick / point movement and at Delta you're currently 'laying out' well over $600 to make the same $1 per tick / point movement. You tell ME which looks 'riskier'.

From what I can see from this little 'excercise' the only reason that very high leverage COULD be a 'bad thing' is IF YOU cannot CONTROL YOURSELF and stick to a good set of money mangement rules i.e. lower leverage DOES NOT equate to a different or lower tick / point / pip value so if you're trading Soybeans for example it does not matter WHAT your leverage setting is if it goes limit down your would STILL make / lose the same amount regardless of how much margin you'd 'layed out' for the lot.

Unless my understanding of this WHOLE thing is wrong then AGAIN I'd say that THE ONLY REASON that 'leverage is a killer' is because a person MAY tend to overtrade the account because they now have more margin available to them to trade on a given amount of capital BUT if you're using a good set of money management rules then I don't see the difference UNLESS as I say I've had this wrong all this time and GCI is 'screwing with my brain'.

I have asked GCI to INCREASE the leverage on my accounts to 400:1 to see what happens i.e. to see what the difference is going to be because I'm NOT getting this!!!

I'm also going to ask John Foreman ('rhodytrader') to either confirm the above or to RE-EXPLAIN leverage and the pitfalls of having higher leverage.

Anyone else feel free to 'chime in'!!!

[chirules54]

Hi Dale, how's the day been for you? Gold took quite a tumble yesterday but thankfully the volatility trade got me in short several days earlier, and I'm enjoying the ride so far

Anyway, I am almost ready to start trading the SI live, but there is one thing stopping me. I plugged in the numbers (high/low/open/close) from the book to verify my excel sheet, and I'm pretty sure I found another error in the book. On Day 7, I get an SI value of -53, but in the book it is -45. All of my other SI values match up with the book except for this one, so I'm wondering what the problem is... if you could verify this for me it would be much appreciated.

I was also wondering, if you think that "business" with the 7-day EMA as a filter to the SI you mentioned earlier is still worthwhile? I will pretty much be only trading the SI on the daily timeframe because school (and sleeping) are preventing me from doing otherwise, so I was wondering if you still think it is a good idea to use the ema.

-Nick

[dpaterso]

Yo,

I've checked and my value agrees with the book i.e. -45. The value just above it is 54 i.e. are you sure you're not just looking at the wrong line or something (no offense but it's REAL easy to make mistakes on this thing initially). Are you also sure that your functions are correctly set up i.e. the MAX() function for 'R' as this would make a difference.

As far as the 7 period EMA is concerned I'm not using it i.e. not for any good reason really i.e. just back to the SI System on its own i.e. purely 'mechanical' SI. While the 7 period EMA sometimes keeps you out of bad trades it also keeps you out of good trades especially on a stop and reverse so I've just 'kinda' dropped it and I let the SI System just 'do its thing'!!! To be hones: I don't think that this system needs any tweaks whatsoever (I know I said that it MAY at one time but it's proving itself over and over and over again to me). As 'boring' as that may sound it 'just works' so I'm done with 'messing with it'!!! The key to the SI System is to follow it 'religiously', trust it, never miss a signal or second guess the system, and do not overtrade your account i.e. stick to either Wilder's money management rules or mine and you cannot go wrong.

Let me know if you can't figure out what the problem with your calculations is and / or send me an email to dpaterso@forexbrokersonline.net and I'll send you a copy of my worksheet that I used to check my set up with the book.

[datom]

Hi Dale,

I'm still waiting for Wilder's book to arrive from Amazon.com (should be here within the next week hopefully!).

Just curious to know if you are still trading the daily charts (as I believe the SI follows??) and also if you are still trading forex pair profitably? (or are you really just onto commodities now?). If so, how many pips on average to you profit a week?

Can't wait to get the book!

Cheers,
Tom

[Bocajunior]

Hello All, Dale and Charles,

Thanks to both for the valuabe input to this thread. I haven't had much time to post what with work commitments and all, but I'm reading along and at the same time I'm working my way through the book.

I read about a few chapters and right now I'm trying out the VI system. I still have to re-read the section on the CSI to help fully understand it but I'll get there. I also got lost a bit half way through the Directional Movement section so a bit of re-reading there as well.

Thanks for introducing me to this book Dale. Has been great so far.

Best Regards
Boca

[rhodytrader]

Originally Posted by dpaterso

I have not been able to make sense of the fact that by DECREASING the leverage all you are really doing is INCREASING the amount of margin required to open a position. Right up until today I was under the impression that by DECREASING the leverage you were protecting yourself in some way by REDUCING the value of a single tick / point / pip movement and that INCREASING the leverage was a 'bad thing'. What I can't 'fathom' is if you are staying within your (Wilder's) money management rules then it WOULD APPEAR that INCREASING the leverage makes it EASIER to 'stick' to those rules. Let me explain:

Dale, as I've said before (several times, I'm sure), the ONLY THING that changes pip value is position size. It matters not one iota what your leverage is. If you're trading a full EUR/USD lot a pip is going to be worth $10 no matter if you're using no leverage or 1000:1 leverage. The only thing that changes with your leverage ratio is your margin requirement.

See How much leverage to use? Wrong question! for further discussion.

[dpaterso]

Yo everyone,

OK: first a big thank you to John for the confirmation. Seems I've been under a bit of an 'illusion' here!!!

Right: what this really means to ME then is this:

As we have now found out (love the way John explains things i.e. none of my 'waffle') leverage is NOT going to make a difference to what MAY happen to your account (ASSUMING you follow a good set of money management rules of course) it's WHAT you trade that's going to make the difference SO it then really makes no difference whether you trade the Dow Futures at GCI or the Dow 'proper' at Delta. With that in mind it DOES then make a difference whether or not you trade Soybeans for example i.e. it would appear then that it's NOT a good idea to trade Soybeans with a $500 account!!! In other words it's the INSTRUMENT that's being traded and the value per tick / point / pip movement of that instrument in relation to your capital that's important. FINALLY!!! (I think I've got it John)!!!

Tom:

Geez: I thought WE always got 'the last shipping container to leave Amazon' over here!!! I have been trading with the SI System on different timeframes and it always seems to work. As with ANY system the shorter the timeframe, the more 'false starts' you're going to get and the less your potential profits and losses are but the SI System does appear to work on ANY timeframe. I'm currently working on the 4 hour timeframe and it's working well (but I cannot honestly say that it's any better or any worse on the 1 hour timeframe). As I think I mentioned earlier: as long as you 'stick' with the system regardless, do not 'second guess' it, take your losses 'like a man', ride out your profits 'like a veteran trader', and never forget to place stop and reverse orders, I don't see how you or I can go wrong (again)!!! As far as pips per week / month go I don't count them i.e. I only look at percentage gain on starting capital at the beginning of the month / period and I can tell you that MY average is VERY HIGH (sorry but I unfortuantely cannot be more specific than that nowadays because of my business. The only clue I can give is this: if the banks gave you 100% per annum on your money you'd not even be close). To be honest: I am surprised myself BUT having said that the really strange thing is this: I am doing OK NOW BUT NO NECESSARILY because of the SI System!!! Now I know you're all 'throwing your hands up' and saying 'NOW what is he on about'!!! It has taken me a VERY long time to learn this but FINALLY the 'penny has dropped' and you know what the 'secret' to this business is: MONEY MANAGEMENT and VERY STRICT adherence to it!!! All of Wilder's systems work on the stop and reverse principal and if you're overtrading your account it does not matter HOW good his systems are you will STILL 'wipe out'. Why? Because if a trade is 'bad' (and there will always be 'bad' trades): you stop and reverse when signalled, take the loss, and let the new position run. If you're overtrading your account: one or two successive losses could put you in such a bad position that you CAN no longer stop and reverse when necessary and with Wilder's systems that's 'the thing' i.e. if the first trade is 'bad' then next trade after the stop and reverse almost always covers the loss on the initial trade AND makes a profit over and above that. If you're overtrading and you can only stop and not do the stop and reverse because you've now run out of margin then it's only a matter time before you're either reaching for the credit card to 'pump up' your account OR you're 'out'. And it's not easy I can tell you i.e. sometimes I find myself opening positions that will 'j-u-s-t' push my money management percentages over their limit and guess what: I have mastered the art to say 'NO'. 'NO TRADE'!!! 'TRADE MISSED'!!! 'THERE WILL BE ANOTHER ONE'!!! I either close pending orders that will push my money management percentages over their limit (even 1% over) if I find I've placed too many orders or I don't even think about placing an order if I'm going to use even $0.01 more of total margin / margin required for the position that my money management rules permit. You will NOT believe the difference this makes and the stress that it relieves. When a position is going 'south' on you (me) you no longer sit with a 'sick' feeling in your stomach or feel the need to 'jump' on the position and take the loss because you can't stand it anymore OR because you're heading for a margin call. You are able to 'ride' the position out (be it profit or loss) KNOWING that if it's a bad trade you WILL get another good trade, cover the loss, and come out on top in the end. Oh and this week I've been pretty much concentrating on the major forex pairs with the SI System (probably for no other good reason than to prove a point to someone)!!! It works.

Boca:

I am so very pleased that you are happy with the book. It took me a LONG time to grasp many things (and the one or two mistakes in the book don't help at all I can assure you) BUT I can tell you that it's the best $70 or so (I bought mine before I knew any of you so NO DISCOUNT for ME) that I will EVER spend in my life!!!

[chirules54]

Thanks Dale, figured out the problem, I forgot to use the absolute value function for R. Everything is correct now, I'm going to start following the system at the close today with gold and gbp/jpy.

Also, thought I should tell you that my volatility trades are currently not doing as well as I hoped. USD/CAD is now down around 100 pips and AUD/JPY is only around +230 pips, after it was as high as almost +700. However, I am still a ways away from a stop and reverse on both pairs, so I will hold on to these until I'm told to stop and reverse.. kinda tough but I gotta do it.