J. Welles Wilder passed away on 18 April, 2021, leaving a legacy of changing the way that many analysts, traders and investors study and trade financial markets. His seminal book ‘New Concepts in Technical Trading Systems’ was published in 1978. It is not a long read – only 118 pages. It is also not an easy read as Welles Wilder illustrates how to calculate his indicators in great detail using tables and worksheets, which can be tedious at times.
There were books on technical and chart analysis written before 1978 and plenty of books about technical and chart analysis have been written since 1978 of course, including a plethora of books on ‘behavioural finance’ over the last 20 years as authors cast a wide net to make sales. But Welles Wilder’s book stands out as he comes out and says ‘I need a system to trade the markets, I need a system to tell me if I am trading a trending or non-trending market, and I need a money management system’.
His book details the different indicators and systems that should be used when markets are trending or not trending (and how to determine the different states of trend). Analysts, traders and investors may often use the technical indicators and systems that he invented, without even knowing it. As the reader goes through the book, one of the final chapters details his ‘Commodity Selection Index’. Here Welles Wilder gets into leverage cost, volatility and ties in some of his other indicators in order to try and focus the trader on the markets that it makes sense to trade at that time. As he states – ‘Most technical systems are trend-following systems; however, most commodities are in a good trending mode (high directional movement) only about 30% of the time. If the trader follows the same commodities or stocks all of the time, then his system has to be good enough to make more money 30% of the time than it will give back 70% of the time.’
The most famous of his indicators introduced in this book is the Relative Strength Index (RSI) which every Bloomberg and Reuters terminal charts, and all of the free (and paid) internet charting /broking systems use as well. Did Welles Wilder get paid for this? I asked a market data/chart vendor in the early 1990’s if they paid royalties or copyright fees for using all of the Welles Wilder indicators in their system, he looked at me as if I had two heads and was talking gibberish – the answer was no. This explains why many of the indicator and system developers since then protect their copyright and trademark rights – and why so many chart vendors use ‘almost the same, but crucially different’ naming of indicators and systems so they don’t get sued!
Having programmed Welles Wilder’s indicators into mainframe computers in the 1980’s, moving onto Lotus 123 (remember that?) and then Excel spreadsheets, writing analysis, proprietary trading at banks and helping to run funds and investments in all asset classes, I have learned that it takes discipline to use his indicators and systems. For example, the RSI seems simple, but this is not just an ‘overbought/oversold’ indicator. There are a lot of nuances (which Welles Wilder goes through) in using the RSI which are important to understand if you are using it.
A table that appears near the end of the book in the ‘Capital Management’ chapter is important for any analyst, trader and investor to understand (my version is below). There is a cost to losing money, and the more of your capital that you lose, the bigger the hill to climb to make it back. A 20% loss of your initial capital requires a 33.33% return to make up, for example, while a 90% loss of your initial capital requires a 900% return to make it up. A simple lesson and common sense, but often forgotten it seems. Thank you Welles Wilder.