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

[dpaterso]

Hey:

VERY nice post!!!

VERY nice idea (about calculating the 'ATR width' of the range)!!!

A 'light bulb moment'!!!

THAT is what this thread is FOR!!!

Edit:

As a MATTER OF FACT: could THAT not be part of a 'range' solution??? In other words: if the range does not exceed at least 1 x ATR is it even worth TRADING that instrument??? Food for thought???

[chdorry]

Originally Posted by dpaterso

Hey:

VERY nice post!!!

VERY nice idea (about calculating the 'ATR width' of the range)!!!

A 'light bulb moment'!!!

THAT is what this thread is FOR!!!

Edit:

As a MATTER OF FACT: could THAT not be part of a 'range' solution??? In other words: if the range does not exceed at least 1 x ATR is it even worth TRADING that instrument??? Food for thought???

Well I have been toying with another idea, but I'm not sure it has merit. Let me post my random musings on it here, and others can comment. It is almost an "indicator" of sorts. I've done some reading on technical charting over last few days, and everything I've read kinda points to candles with larger bodies having more significance than thin bodies (commonly called dojis where the candle just looks like a cross). Anyway, here was my thought on the matter - its a running total like the ASI is, but I'd have to work on the exact "parameters" that signal entry, etc.

My idea for the "daily delta" is to take the close minus the open and divide that quantity by the ATR. Since ATR in foxland is 99% of the time the high minus the low (that wouldn't really change unless there is a gap), that could be used in the forex world, or use the full ATR which has other criteria considered as well.

Anyway, I'm thinking that when the candle is full (ie body covers most of the range) the indicator will get a bigger boost up/down, and when the body is small (ie doji) the indicator will really not have much of a reaction.

So in a nutshell it would be this: (Close-Open)/ATR. I'm going to set this up in excel and see if I can make heads or tails of value of it. It could fall analogous to VSC1, since when the net result of close-open (over a few days) is equal to ATR, then this could signal entry. One thing that would be different though is this indicator might not get a "false start" that *could* happen with VSC1, especially when you have a long tail on the high/low bar.

Just a though, I haven't had time to set it up yet and try to correlate this to some sort of "trading indicator".

Interested to hear other's take on the idea.

[dpaterso]

Good Saturday (good MONTH END) morning!!!

Well:

The good news:

Total monthly gain for the month across all accounts (excluding commissions earned): 21%.

Not GREAT BUT there IS something that I kept forgetting about that I SHOULD have mentioned on the thread:

With STOCKS there is a saying: 'Sell in May and go away'!!! Whether this is in fact holds true or not I cannot say for sure. I CAN tell you though that STOCKS are relatively 'quiet' over this period because of holidays etc. I remember this from last year i.e. during the period the American's refer to as 'the driving season' STOCKS are relatively quiet and there is much lower volume traded on the NYSE relative to the rest of the year and this of course leads to higher volatility which is something you DON'T need with a trend following system. HOWEVER: from Tuesday (Monday is 'Labour Day') we're 'back in full swing' on the NYSE so 'hold on to your seats' you 'hounds'!!!

The 'even better' news (for one):

My very first managed account, opened during the second week in April, is now on a 97% gain on capital!!! I WAS hoping for the 100% mark on this account by yesterday but I missed it by a 'hair'!!! (Sorry Mel!!! Give me another week)!!!

Now:

As per my 'open book' policy there IS something that I'd like to post here (especially before you find out from anyone else) and as you know I DO endeavour to post details of the 'good and bad':

UNFORTUANATELY I had to honor a guarantee this past month. In other words: the monthly % gain on initial capital on the particular account fell 'short' of the guaranteed amount. This WAS in fact my fault no question. It was a very small account (one of the original 'self trade' accounts where the client was guaranteed a 10% monthly gain on initial capital IF they followed all signals given to them and did not attempt trades on their own). However: because sending these signals out every night just got to be a 'pain' (not only was I having to send the signals out but I then had to explain them as well which is something I really do NOT feel like doing at 02h00 in the morning) I 'elected' to trade the account for the client myself. Problem is: because the account was so small (under the minimum of the $2 000 USD required) and because of an 'altercation' between the client and myself I kept forgetting to place orders on the account etc. In other words I was not 'watching' the account as I would my own or a 'managed account'. To make matters worse: I erroneously 'Un-Enron'd' a position in the wrong direction thus realising a loss on a position that WOULD have turned to nice profit!!! Anyway: the point is that I 'ran out of time' to 'catch up' after this loss so my apologies to the client (BUT you did 'clear out' with your 10% monthly gain on initial capital guarantee and your initial capital intact)!!! (Please note: that it was BECAUSE of this account that the 'self trade' accounts with the 10% monthly gain on initial capital guarantee were stopped so for any exisiting clients that read this message please do not be concerned i.e. the 'managed accounts' are traded 'as if they are my own'). Anyway: I did 'the right thing' and fulfilled my obligation to the client and although it cost me a few USD it felt good!!!

NOW (moving on):

THIS month I believe we will see TRIPLE DIGIT % GAINS IF you follow me here!!! There are some AMAZING trades coming our way this month (on FOREX Craig) so watch this space!!!

Edit:

Further to my 'Sell in May and go away' note above: I found this article (with an interesting statistic and some even more interesting commments below the article itself WHICH oddly enough is written by someone from Cape Town):

Sell in May and go away: fact or fallacy? » Investment Postcards from Cape Town

YOU be the 'judge'!!!

[tonymand]

Originally Posted by dpaterso

Good Saturday (good MONTH END) morning!!!

Well:

The good news:

Total monthly gain for the month across all accounts (excluding commissions earned): 21%.

Not GREAT

I think you are doing yourself a disservice or maybe you are just naturally modest! Thats an excellent return mate so if you wont blow your own trumpet then I will blow it for you!!

[dpaterso]

Hey Tony,

Thanks for 'dropping in' (I do consider it an honour that you 'mosey on over' now and then)!!!

You're PROBABLY right!!! MY problem is that I'm 'hung up' on the 61% and over 'months' I've had so when I fall short of those figures I feel I'm doing something wrong. I HAVE learned, however, to not 'chase' previous accomplishments though so 'it is what it is'!!!

Actually: I don't know if you trade 'other peoples money' but you'd be SURPRISED how quickly a 100% NETT gain on initial capital in four months for a client gets perceived as 'not good enough' or 'an arbitrary return' by the client!!!

Interestingly enough (I was having this discussion with a new client this past week): I've been pretty 'vocal' about the BIG firms NOT 'passing on' the HUGE gains that I believe that THEY make on client funds to the client. What I am not factoring in, of course, are the 'costs' needed to run those HUGE firms!!! I suppose THAT is why I'm able to offer these returns (or at least one of the contributing factors anyway). Just thought this needed a 'mention'.

But anyway: thanks for 'blowing my trumpet' anyway!!!

Now:

I've posted 'a chart or two or three' DEMONSTRATING WHY I believe that the VSC1 is 'THE system' (see attached).

GBP/USD:

As you know I went long based on a signal from AC (turned green and was below the zero line). Needless to say this trade has gone 'south' BUT because I've been tracking it with VSC3.1 I'm still 'in' and not too sorry I might add (although I suppose I COULD have 'Enron'd' it and waited for the signal I'm NOW waiting for. Read on). What I'm waiting for is a close contrary to the VSC1 (the green line). This is a long signal. Now I'm EVEN prepared to 'wager' that WHEN this happens you're ALSO going to be getting a SIS TrailingIndexSAR signal to go long; an AO that has turned green from red below the zero line; an AC that is green; an ADX that has started to turn down, and a RSI that has turned back up over the 30 level. Hell: you MAY even get a +DI crossing up and over a -DI!!!

You'll also note on the chart what I was saying yesterday i.e. it's 'uncanny' how the price seems to JUST stop above the VSC3 line (the red line). This has been happening every day since I've been tracking this trade. JUST when you thought it was time to 'Enron' it 'gave back'!!!

GBP/JPY:

Same as above (although not 'in' yet but waiting for the signal).

AUD/NZD:

Now THIS is an interesting 'application' of the VSC1!!! You'll note that I have two instances of the VSC1 on the chart (one 'looking to go long' and one 'looking to go short'). OBVIOUSLY this pair is now in a consolidation phase AND JUST LOOK where price is closing relative to BOTH VSC1's!!! I PERSONALLY would say that a close contrary to EITHER VSC1 SAR could be considered a breakout. Would you agree??? And you COULD verify the direction of the breakout trade using the other indicators of course (if you felt it was necessary).

There are LOADS of these types of trades coming on 'big payers' very soon (GBP/JPY, GBP/NOK, and GBP/ZAR to name but a few) and if my theories are 'on the mark ' then THIS is WHY I say we COULD be looking at triple digit % gains this month IF you follow the system and your money management rules!!!

[kaalilaatikko]

Here is the result of my first full month: +9% (4% up from the start). I started on loss and managed to climb above breakeven, with some ups and downs in between. I am satisfied in that this is my first month on profit ever, including the demo trading period. Still, there were some stupid trades that I could have lived pretty well without. I have learned a lot anyway, and if September is going to be as Dale is forecasting, I'm expecting to see bigger figures to come.

The above figure is calculated from my account, not the open trades. If you had asked my opinion one month ago, I would have liked to include the open positions as well. Now my eyes have opened for what Dale discussed about the profit counting principles a while ago. The open positions just are not the whole truth, they rather give a distorted picture of the whole situation. Personally I have more open positions now than ever, used margin is 16%. But all of these except one are such ones that I could open them again, if I weren't in already. The one is AUD/NZD, where I did a small mistake when entering - correct use of VSC1 would have saved me from it. Not surprisingly, I'm expecting the current VSC1 line for long to break now! All the rest of my positions are CFD, so when the stocks start to rise again, I'm expecting to see a lot green. On the other hand, if there is now a general collapse of the stocks coming and all my VS 3.1 stops start getting hit, then I/we have a problem. But I doubt that.

I have been counting the used margin based on the account. But I just noticed that Delta shows the free margin by subtracting the used margin from the sum of positions and account. If I calculate the current loss of the open positions on top of the used margins of individual trades I get the difference between the account and that free margin. That difference makes 19% for me right now. Is it that figure that I should worry to not exceed 30%, or is it still ok to look only at the margins of the individual trades (my 16%) even when the positions are (hopefully) temporarily on (possibly big) loss?

- I have some ideas on Craig's range-ATR indicator, but I need to think about them a bit more before posting too much too early. Dale mentioned my earlier tests and based on them I can say that if you blindly go and follow VS with C=1, it will be a disaster for any forex pair (don't know about CFD). You definitely need something to assist in entries and exits.

J.

[dpaterso]

Good (Saturday) evening.

First:

kaalilaatikko:

WELL WELL DONE!!! To START your trading 'career' 'up' is something let alone 4% OVERALL!!! So again: well done!!!

I see that you've ALSO discovered the 'merit' of the VSC1!!! It APPEARS to keep you out of bad trades (or rather trades that you should NOT BE IN YET)!!! I ALSO doubt very much that 100% of (CFD) positions can go against you and hit the VSC3.1 SAR!!! That (in my opinion) would INDEED signify a TOTAL collapse of the stock market (and EVEN IF that happened you'd either 'Enron' the positions OR SAR and ride them short to 'zero')!!!

You have worked out for yourself how Delta's platform calculates the free margin percentage (I should have posted that calculation on the thread as it was given to me by them when I wanted to withdraw some funds but could not quite work out the effect such withdrawal would have on the free margin percentage because I had open positions). Yes: it IS this percentage that should not drop below 30% as per your 'Delta Trading Agreement'. I tend to 'ride' this percentage to an ABSOLUTE minimum of 100%. If / when this percentage gets to 100% then I know it's time to start taking profits on open positions or 'Enroning' open positions (or time to 'panic'). That said though: if you're following your money management rules 'to the letter' you should never get even close to 100%.

I (obviously) agree with you that taking open positions into account when reporting gains distorts the results. I work of the premise that 'it's not over 'til the fat lady sings'. In other words: I could be showing HUGE profits on open positions on the last day of the month but those same profits could turn to losses the very next day (an extreme example but it DOES happen) and by the same token I could be showing HUGE losses on the last day of the month but those same postions will in all probability turn to profits in the next few days. I suppose the REAL gain can only be reported at the end of a period with NO open positions whatsoever. That's where 'the rubber meets the road' (and by the way: the % gain on 'managed accounts' ALWAYS EXCLUDES open positions)!!!

And last (regarding the VSC1 or VSC(anything)):

I am NOT advocating to follow it 'blindly' with ANY set of constants. I AM, however, of the opinion that 'getting in' with VSC1 (or a far smaller constant than 3.0 or 3.1) is 'the way to go' for forex pairs and stocks. Now whether you decide to use VSC1 to TP or VSC2 to TP and VSC3.0 or VSC3.1 to either SAR, 'Enron', or 'reach your pain threshold' is entirely up to you. I am NOT a 'fan' of backtesting for the reaon that I THINK you may have been alluding to i.e. backtesting is 'purely mechanical' a.k.a. 'blind' so it proves nothing to me. There are times I'll let a trade run and there are times that I'll TP based on 'common sense' and backtesting cannot factor in this type of 'action'. I also think that one thing needs to be mentioned here: the VSC(anything) is NOT going to work with each and every scenario. The 'ideal' scenario from what I can see is an instrument / pair that has been trending for a long period of time (the GBP/??? pairs right now are fine example of this) and then enters a period of consolidation (the USD/??? paris are good examples of THIS) (or if you're REALLY lucky the trend reverses instantly)!!! There are certain instruments / pairs that just never (appear) to trend one way or the other and on THESE instruments / pairs I think you'd have a problem (this is nothing different from the instructions in 'the book' though I might add). The bottom line: NOBODY is going to give you a 'pat on the back' because you followed ANY trading system 'blindly' but still lost money!!! You WILL, of course, score 'brownie points' IF you make profit but did NOT follow a trading system 'to the letter'!!! As I have noted before: entries are a dime a dozen but profit is in the exits (well not my note but a loose 'quote' by John F. Carter)!!!

Let's ALL hope I'm right about our 'triple digit gains' this month (I believe that even if they're NOT 'triple digit gains' they'll be 'close to')!!!

Keep up the good work and 'keep at it no matter what'!!!

Have a WONDERFUL week!!!

[kaalilaatikko]

Originally Posted by dpaterso

Yes: it IS this percentage that should not drop below 30% as per your 'Delta Trading Agreement'. I tend to 'ride' this percentage to an ABSOLUTE minimum of 100%. If / when this percentage gets to 100% then I know it's time to start taking profits on open positions or 'Enroning' open positions (or time to 'panic').

Actually this is very good information that I did not realize to ask, glad that you brought this out! I placed my wording a bit misleadingly. Here is an example about what I was after. Let's assume that I have consumed 27% margin on open positions that start to drop. Now my account stays the same and I would have still 3% to go until I have spent 30% of my margin. But the drop could cause that the Delta's figure would show, say, 60% free margin available, i.e. 40% used. I would in such case not open any new positions by common sense, but if you looked at the MM rules, would you say that yes, you can still occupy 3% additional margin on great new positions, or would you say no for any new positions until Delta's free margin is again above 70%?

Originally Posted by dpaterso

I am NOT advocating to follow it 'blindly' with ANY set of constants.

I fully agree with you and nowadays look at backtesting with a bit more critical eye than a couple of moths ago. Though, I would say that if you combine it with a bit more information than just the mechanical numbers, e.g. manually filter clearly bad trades away, I still would like to think that you might be able to see something about the quality of the indicator before using it live.

It is only those mechanical numbers for VS with C=1 that are a no-no - when followed blindly. I hope that you did not read my sentence in such way that I would in turn advocate only those systems that get good mechanical backtesting results and their blind following, and because of that look down on other data.

J.

[chdorry]

Originally Posted by dpaterso

I am NOT a 'fan' of backtesting for the reaon that I THINK you may have been alluding to i.e. backtesting is 'purely mechanical' a.k.a. 'blind' so it proves nothing to me. There are times I'll let a trade run and there are times that I'll TP based on 'common sense' and backtesting cannot factor in this type of 'action'.

Well I'd agree with this to a point, but there is *some* merit in backtesting. By that I mean if you take your trading system and "backtest it" and it shows you're losing money trade after trade, obviously you have something wrong. Now if it shows profit, that to me means there's some merit in actually trading it and then seeing how it plays out in the "real markets.


The one thing that a lot of people don't realize is that there are systems that will cost you money live trading but will prove profitable when you do backtesting with them.

So to me, backtesting is just seeing if there's something in the system worth looking at in the live markets.

[dpaterso]

Good (Sunday) morning!!!

Margin percentage:

I must say that although I 'loosely' say to margin between 15% / 22.5% / 30% of your account balance and 1.875% of your account balance for position size I'm starting to favor using no MORE than 15% of your account balance as margin and 1.5% or below for position size (the 15% being the more important rule of the two). This is, of course, because I'm NOW (probably) trading the VS(anything) more than the other systems and you HAVE to leave room for potential BIG losses before they turn in your favour with the VS(anything). As I said: the 15% rule is more important than position sizing i.e. if you reduce your position sizes you can open more trades but you should never exceed the 15% (or the 22.5% / 30% rule depending on which 'configuration' you use). By following these rules your should NEVER be in the position where Delta's free margin percentage is below 100% no matter HOW big the losses that you may be carrying. You also have to factor in the following: when you have a very large account balance you can then start thinking about the fact that even although you may be using less margin and smaller positions the actual MONETARY value i.e $$$ value of your trades is increased anyway even WITH more conservative money management rules. In other words: to START OUT with it's OK to use the 1.875% / 15% / 22.5% / 30% rules to 'boost' your account but eventually you get to a point where it's not necessary to use such large percentages. I hope that makes sense. Let me put it another way: there is nothing WORSE than not being able to go to sleep at night because you COULD get margin called and conversely there is nothing NICER in this business than to sit and watch a trade going against you and NOT having to panic!!!

Backtesting:

I think we all agree to disagree on some points here. I mean: I'd agree with you Craig that if you're backtesting something and it NEVER shows a profit then it's time to change something!!! With these systems: the ONLY one that I'd say could INDEED be followed 'blindly' is Parabolic SAR and from the backtesting that others did last year it's always profitable 'in the end'. With the other systems there is 'personal judgement' that 'comes into play'. I mean: I know for myself that I don't take EVERY RTS trade that APPEARS to be valid for example i.e. I take a host of other factors into account with that system before deciding on a trade and the same with the SIS, VS, and DMS. For example: you're not going to take a SIS trade to go long when you can clearly see that the instrument is trading at an all time high and has tried unsuccesfully to break resistance above!!! I don't believe that ANY backtesting algorithm is able to factor this type of thing in. And as you well know: I really do favor the trades where I can go long and I can clearly see support below and this works 99.999% of the time for me (and the only time it has NOT worked was on USD/RUB when that broke through support a while back BUT even AFTER that happened I was able to BE eventually because of my 'Enron' system). I don't like those trades where price is 'in the middle' of the chart in front of me (AUD/NZD is an example of this BUT having said THAT I'm keen to see how the VSC1 'plays out' on this pair). Another example of something that I would NOT like is EUR/CAD i.e. I'd far rather wait for the price to get to the 1.62000 region and then start looking for a short (although ODDLY ENOUGH there is a VSC1 long signal right now so again this should be interesting to follow through and see what happens). The type of trade that 'turns me on' is, for example, GBP/NOK right now i.e. clear support just below where the price is right now (and of course it's been in a downtrend and now moving in the direction of the VSC1 SAR). But AGAIN: I'd be watching the price of Oil and what's going to happen with 'Gustav' (the NOK is also a 'commdoll' for those who don't know i.e. it's price is very closely correlated with the price of Oil). Again the point is this: NO backtesting algorithm that I know of could factor all of this in.

Anyway: in just looking at the charts AGAIN this morning I honestly believe we have some BIG winners coming our way so keep watching. I KNOW I favor stocks over forex but THESE are the type of 'gift horse' forex trades I was talking about!!!