Reviewed by Ed Dobson, President, Traders Press Inc.
This classic book, published in 1978, is the original source for six technical trading systems from Welles Wilder. Writing this book established Wilder's reputation as a respected technician. In more recent years, he has become better known for his promotion of the Delta Society, the Delta Phenomenon and the Adam Theory.
The main message of the book is that a good technical trading plan consists of three elements. It requires use of:
- A good technical system
- This system on the right market(s) at the right time
- Good money management techniques
Wilder advises that, of these, the third is the most important, the easiest to learn and the hardest to do.
Wilder's treatment of money management is very brief and concise. He sums it up with two criteria: Don't margin more than 15 percent of total capital on one commodity or more than 60 percent of total capital at one time. The balance of the book emphasizes the difficulty of recouping trade losses and how the percent gain required to recoup a loss increases geometrically with the loss.
Development of technical systems and a method of selecting the right markets are the primary topics of the book. Wilder advises that he has never seen a technical system that CONSISTENTLY makes profits in all markets Trend-following systems typically make consistent profits in DIRECTIONAL markets but sustain consistent losses in NON-DIRECTIONAL markets. Because markets are typically non-directional 70+ percent of the time and directional 30- percent of the time (Wilder's figures), the answer to consistently profitable trading would appear to be the discovery of a way to define directional movement and translate this definition to a rating scale within known parameters.
The most important contribution of the book, in both Wilder's opinion and my own, is its development of the Directional Movement Index, which is Wilder’s answer to this problem. Other important contributions are the development of Parabolics and Relative Strength Index (RSI). All three are still widely used today, and are standard inclusions in most stock and futures analytical software packages. The other systems in the book are not well known and are of lesser importance.
The book is heavily oriented toward illustration of the calculations necessary for implementing the systems (including manual worksheets). This information (probably half the book) is superfluous today to those with analytical software. Limited guidance is offered on the interpretation and use of the indices.
The systems are treated as stand-alone mechanical systems rather than as tools for market evaluation and interpretation. The markets chosen for examples have large up and down price moves with little prolonged congestion (non-directional). Very little is given in terms of systems testing results. However, all ideas are clearly explained and illustrated, including difficult concepts, such as momentum and directionality.
Readers interested in material offering more guidance in interpretation and use of these and other technical indicators, studies and systems are encouraged to read these three newer books: LeBeau's and Lucas's Computer Analysis of the Futures Market, Elder's Trading for a Living and Martin Pring's On Market Momentum -- by far the most thorough.
Edward Dobson, President
Traders Press, Inc.
http://www.traderspress.org
You can find additional information, including a detailed table of contents on Wilder’s book, at: http://www.traderspress.org/detail.asp?product_id=47
