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

[dpaterso]

Good (Wednesday) morning all,

Hey Randon:

I'm with you this week!!! Not a lot of movement at all by the looks of things!!!

sirkeen:

I've sort of 'played around' this morning with ADX and ADXR i.e. I've tried shortening the period and lengthening the period but I'm not seeing where EITHER is beneficial to us. AGAIN: using AUD/NZD as a 'primo' example go and shorten the period to 7 and then lengthen it to say 28 and look at the ADX and ADXR values AS THEY RELATE to what's happening on the chart. Shortening the period to 7 does indeed 'get' both ADX AND ADXR below 20 - 25 more often when the pair is trading in a range BUT (and this is an IMPORTANT 'BUT') both values fluctuate FAR too much i.e. they easily jump to above 25 EVEN ALTHOUGH the pair is STILL trading in a range (and now that I think about it this WAS the reason that I 'switched' back to the default of 14). In other words (from what I can see): shortening the period makes them too sensitive to price changes and short rallies up or down when the pair is STILL REALLY trading in a range. Using a higher value i.e. 28 for example: by the time ADX and / or ADXR are indicating that the pair is trading in a range and you should be using the RTS or TBPS the pair has started trending already!!! Take another look and see if you agree me with or not.

kaalilaatikko:

Hello and thanks of the post and insight.

My money is on ONLY ADX (unless I'm going to factor in the CSI for choosing trades which unfortuanately is a REAL pain to set up for forex pairs because most of the time we're working with fractions of USD or whatever your base currency is).

Actually: WHILE I was typing the above I had another thought!!! Could it be possible that he is saying something along THESE lines:

If you're going to factor in the CSI to your trading THEN trade ONLY the instruments or pairs that have a HIGH CSI rating (which of course incorporates ADXR) BUT choose the trading system to be used based on ADX??? OR: if you're NOT going to use the CSI then again trade ONLY the instruments or pairs that have a HIGH ADXR rating BUT choose the trading systems to be used based on the ADX??? There is a very subtle difference here. In other words: let's say you were drawing up a spreadsheet like mine i.e. my Daily ADX ADXR Work Sheet. So NOW: you find the TOP 9 or 10 or 11 or 12 (as much as you mm rules will allow) CSI OR ADXR RATED INSTRUMENTS OR PAIRS AND THEN choose the trading system to be used ON THOSE TOP CSI OR ADXR RATED INSTRUMENTS OR PAIRS based on the value of ADX??? Could THIS be the 'ADX/ADXR magic bullet'??? Let me know what you all think. For some or the other reason this DOES make sense (well to me anyway)!!! In other words (and quite rightly so): CSI and / or ADXR will determine which are the TOP RATED INSTRUMENTS OR PAIRS to be trading and ADX will determine which system to be using!!!

[dpaterso]

Actually:

You know what???

The more I think about the post above the more this makes sense (AGAIN to ME anyway) and MAY just go toward answering Randon's question about the current state of the markets and why none of his (and MY) TP's have been hit this week!!!

Think about this for a moment:

By attempting to choose trades based on whether or not BOTH ADX AND ADXR are above or below 20 - 25 what are you ACTUALLY doing??? Yes: ADX is indicating that you should be following a trend following system if it's above 25 and yes if ADXR is ALSO above 25 then you have good directional movement. BUT: if ADX is indicating that you should be following either the RTS or TBPS because it is below 25 AND ADXR is ALSO below 25 then what you are in FACT doing is opening RTS or TBPS trades on instruments or pairs which have the LOWEST OF ALL directional movement AND 'the book' quite CLEARLY states that 'Good directional movement is not simply straight up or straight down movement. It is also good up and down movement...' (Page 45 last paragraph)!!!

In short (I have a BAD habit of typing 'novels' to get my point across):

What do you think of trading ONLY the 9 (for example)ADXR TOP RATED instruments or pairs BUT USING ADX to select the trading system FOR THOSE ADXR TOP RATED instruments or pairs???

(A last note on this before I leave it for your input: the above would CERTAINLY explain TO ME why whenever I place a SIS order it normally ALWAYS gets executed for better or for worse BUT a lot of the time an RTS order does NOT get executed)!!!

Edit:

(Yes I could not help myself BUT I'm feeling REAL excited about my 'light bulb moment')!!!

ADXR (or the CSI if you're going to go to the trouble of setting it up properley) will tell you WHICH INSTRUMENTS OR PAIRS YOU SHOULD BE TRADING. ADX will tell you WHICH TRADING SYSTEM IS TO BE USED TO TRADE THOSE INSTRUMENTS OR PAIRS!!! YES!!!

The point is this: it does not matter WHAT trading system you're using (be it Wilder's or anyone elses for that matter). If there is NO (directional) movement then you're not going to make any money and you're just going to land up with positions that go nowhere forever and a day!!!

AS A MATTER OF FACT (YES another edit):

EVEN my CSIADXADXR will have 'credence' here now!!!

Looks like I'm gonna have to REDO my spreasheet from last night BUT I believe the results are going to be ASTOUNDINGLY different from what I've based my current trades on right now!!!

OK LAST EDIT (REALLY):

This is REALLY what makes this book so 'special' to me i.e. it's 'the gift that keeps on giving' man!!! No matter HOW many times I read it (and believe me it's been MORE than a few times) there is ALWAYS something new!!! (Maybe I've just forgotten how to read and comprehend what I'm reading BUT I DO believe that the text is written in a sort of 'freight train fashion' i.e. there is ABSOLUTELY NO 'BS' in this book i.e. you just go from one concept to the next one to the next one sort of like 'bang bang bang')!!!

[dpaterso]

OK: a last post from me so that I can let y'all give some input!!!

For what it's worth: here are (most) of the orders I've placed (last night and this morning).

I say 'for what it's worth' because these orders were placed BEFORE I had the (what I consider to be) 'light bulb moment' above so use your discretion!!!

[dpaterso]

Well well well!!!

I finally think 'the penny has dropped'!!!

Take a look at the .pdf copy of my Daily ADX ADXR CSIADXADXR Work Sheet!!!

(Forget about the CSIADXADXR for a minute here i.e. that's a whole other explanation).

BUT:

From what I can NOW see:

Within the TOP ADXR RATED instruments or pairs (sixteen of them i.e. sixteen is the ABSOLUTE MAXIMUM number of positions I can have open at any one given time without violating my money management rules) I'm seeing fifteen SIS, VS, Parabolic SAR, or DMS trades and only one RTS or TBPS trade!!!

Now take a look at the corresponding charts and tell me what you think!!!

Now JUST BECAUSE these particular instruments or pairs are 'top of the ADXR pops' it does NOT mean that there are VALID entry signals of course BUT if the relevant trading system (as designated by the value of ADX) is INDEED giving you a valid entry signal then THAT is the instrument or pair to be trading at the moment!!!

Could all of this INDEED be the reason why I've not had a single RTS order executed in the past two days??? Look at the pairs on which I have (had) orders (above). Some of those instruments or pairs do not even FEATURE on the attached copy of my worksheet!!!

Also: I've left my order list post (above) intact for you to compare what my CURRENT orders are (were) with what I NOW believe they are SUPPOSED to be.

Edit:

OK well: I thought I'd just go the 'whole hog' here and post my NEW list of orders for today based on the attached Daily ADX ADXR CSIADXADXR Work Sheet for comparison to what my orders WERE earlier this morning.

You WILL notice of course that some orders have not been placed or rather do not appear on the order list for the simple reason that I've either elected to NOT take positions on a particular instrument or pair (like Silver for example) and / or I already HAVE and open position on a particular instrument or pair (GBP/JPY for example). Also: I've highlighted the 'funnies' (mostly 'exotics') in grey on the work sheet SO if you're NOT 'in the mood' to trade the 'funnies' (the 'exotics') then of course you'd just eliminate them from the list and add the 'normal' pairs to the list until you've arrived at YOUR list of the 16 TOP RATED ADXR instruments or pairs.

Something tells me this is now FINALLY correct!!!

[kaalilaatikko]

As nobody has commented Dale's posts, let me throw in a short comment.

Me: "If you use CSI, use ADXR for ranking the instruments to trade with. But when then applying the other systems, you could apply ADX there to get the best out of them." (Sorry, if it is too narsistic to quote yourself ... )

Dale:
"Could it be possible that he is saying something along THESE lines:
If you're going to factor in the CSI to your trading THEN trade ONLY the instruments or pairs that have a HIGH CSI rating (which of course incorporates ADXR) BUT choose the trading system to be used based on ADX??? OR: if you're NOT going to use the CSI then again trade ONLY the instruments or pairs that have a HIGH ADXR rating BUT choose the trading systems to be used based on the ADX??? There is a very subtle difference here."

Exactly! I, too, felt some excitement when writing the lines down, but even more when reading your response! You see, I'm just beginning to sort these things out for myself, and now they seem to be going into a straight line right ahead! I don't have any idea how much correlation CSI and ADXR have, but that might be another good idea here to use ADXR instead of CSI.

J.

[Sweet Pip]

I find that ADX indicator to be a pretty powerful helper indicator. Now when any system I'm trying gives a signal, I check the ADX first and if it's above 30ish and rising (and either the +DI or -DI is following suit), then almost all of my trades have worked out. Conversely, if the ADX and the DIs are lazing around below 25, I pass.

Now I'm using ADX(21) on a 4HR t/f but I feel that perhaps the adx period can be altered to fit the t/f and pair and so still experimenting with that.

[kaalilaatikko]

Gentlemen,

I've been doing my homework with ADX, trying to program its calculations and then debug the reason why my results do not match with Delta's.

I also browsed through this thread (to see that I won't repost anything after initially skipping some portions with lighter reading when I didn't yet have the book), and found vivid discussion 2 months ago about why different brokers provide rather different values for ADX. The most proposed explanation was in the time zone differences.

I finally found an explanation that may have some importance here. Our holy book says on page 37 that an accumulation technique shall be used for determining +DM14 and -DM14. The 2nd argumentation is notable:

"It incorporates a smoothing effect on the DM."

The same technique is in use in calculating all x14 values.

Then I looked at the formula used by Delta. It appeared that they do not use Wilder's accumulation technique at all. Rather they just calculate the sums directly from 14 raw values, i.e. no smoothing there.

It's too late now for me to modify my program to see how much impact this has on the ADX values, but I'll do that in the coming days.

I'm a bit afraid that there are more brokers out there that are not using Wilder's accumulation technique. The reason I suspect is that it is much more compact to express the formula this way in an indicator language like Delta is using, and nobody has really bothered to evaluate the difference in the calculations. But on the other hand it might be quite well that the non-smoothing formula yields a "better ADX" than the lazy man's calculation technique Wilder is advocating.

Any comments?

J.

[randont]

I've been going over in my mind how to make money in this kind of market. And the thought occured to me that maybe we could base which level we set our entries at depending on the ADX/ADXR. For example if they're above 15 set the entry at B2/S2 but if they're below 15 set the entry at B1/S1.

[dpaterso]

Hello,

Randon:

Interesting theory indeed!!! Very interesting thought!!! Just remember though: look at my posts of yesterday. I truly believe I've found the issue. In other words: you should not even HAVE the problem of RTS orders not getting executed if you're trading an instrument or pair that has a high ADXR but a low ADX. Think about it. On the other hand your idea may have much merit for those who ONLY want to trade using the RTS. Good thinking. Keep working on it.

kaalilaatikko:

This 'Wilder smoothing effect' has indeed been the subject of many debates (not on the forums on this site but on the forums on one or two other sites). There seems to be no agreement as to which is the 'better' or 'more accurate' of the two. Many people are of the opinion that the only reason that Wilder did it that way was to save time (and the 'smoothing effect' was just a 'byproduct').

Also: check Delta very carefully. There are two moving average functions (and I forget now which one does which): they are the 'SMA()' function and the 'MA()' function. One of them does indeed perform 'smoothing' exactly as per Wilder's calculations and the other does not i.e. the other only uses the last 'n' periods for the moving average. I know this from coding my indicators and comparing them to my Excel Work Sheets back then. Also (I'm sure I don't have to tell you this but just in case you forget): when checking Delta and using whichever moving average function performs 'smoothing' you have to take into account the fact that the 'smoothing' has started WAY WAY back on the chart so it's not possible to check the moving average accurately by simply choosing a point on the chart and working from there. Of course there is no problem checking whichever of the moving average functions does NOT perform 'smoothing'.

I also saw you noted that you were unsure of the relationship between the ADXR and the CSI. The ADXR will show you which instruments or pairs have good strong directional movement. The CSI will show you which instruments or pairs have good strong directional movement AS WELL AS volatility (and of course volatility equals 'Average True Range').

By the way: there's nothing wrong at ALL with quoting yourself AS LONG AS YOU ARE RIGHT!!! !!!

[midulster]

kaalilaatikko,

I have the same concerns over the ADX calculations.

I have yet to find an indicator on ANY platform that seems to be calculate the same way that it is done in the book.

I made up an ADX worksheet in Excel that I believe replicates the calculations in the book, ie gives the same answers when I type in the example data. But when I put in some back data from my Alpari Metatrader into the Excel sheet it shows significantly different results from the Metatrader and Delta ADX indicators (which dont agree with each other either). And I don't just mean some rounding differences - it completely changes the signals you would be acting on. One indicator is saying a pair is trending while another indicator which is supposed to be carrying out the same calculation is says that same pair is ranging. Apologies and please feel free to slap me down if I'm bringing up a conversation that has been more that covered in the past but I dont see how time differences can account for that, maybe I'm missing something here but if for example the EURUSD happens to be strongly trending for traders in Europe how can it be ranging in the States?

I really admire the lighbulbs that Dale and yourself have been switching on for the rest of us and I worry that even if we come to a perfect understanding of what 'the man' intended for the use of ADX/ADXR we'll still be shooting through the fog if we dont have an accurate, consistent, reliable indicator for ADX/ADXR.

Now I usually find its best to start from the assumption that I'm wrong unless there is overwhelming evidence that I might be right, so I would like to ask a favour. You appear to have seriously good analytical and IT skills and I would be very grateful if I could send you my ADX spreadsheet to verify that it is or is not calculating ADX and ADXR in the same way as the book.

Thanks

Derek