In 1978, Welles Wilder developed the RSI which is considered the core indicator in technical analysis. He is also the author of the book "New Concepts in Technical Trading Systems" which can still be purchased today.
He remarks this: “markets must win or else there will be no markets” This is
compatible with my idea that there is
risk in every kind of markets.
Because markets do exist then the better we handle risk,
the better we trade and the more likely chance that we will be successful.
Wilder points to who the winners are. This infers that
traders learning to trade need to know the game is played
by people who know much more that we do and have been at it much longer.
The picture you should have in your mind is the Shark
Tank at Sea World. No one other than those who are highly trained should go
into the shark tank and swim with the sharks. There is risk and always an
element of uncertainty. But with education and training plus experience people
do swim with the sharks. You can do the same thing in Forex. Remember, no one
is going to give you anything, you will have to learn it.
According to Wilder, “The big winners are the commercial hedgers with huge money to back up
their positions. These are the fundamental traders. The second group of traders
would be the large speculators who are mostly the big commodity funds. They are
technical traders. The last group is the small trader. The small traders
certainly outnumber the other two by I would guess a thousand to one. Since
only 5% of small traders (over time) end up making a profit you can see where
the money comes from to make a market. Fortunately, so far, I am still in the
5%!”
Knowing your role in the markets is crucial. Understanding
what is happening in regard to the bigger players can help you make money. It
normally takes years to understand this concept. Whether Wilder is a winner is another question but the idea that the big traders move the markets. To become successful it is something all traders need to understand.
This next quote is also a key concept that The FX System is now addressing but from a different angle.
“Since the markets must win, most
trading systems can work fairly well for a year or two and they break down to
losing as more and more sophisticated market action adapts to defeat the
system. So what has changed is that the markets adapt to most every kind of
trading system, and it becomes harder and harder to come up with a system that
can beat the markets. But, a few of them do beat the markets year after year.”
Taken at face value that makes sense however, what if the
system didn’t need to be changed. If you have a system that works and it stops
working then the system didn’t change as much as the data that drove the system
changed. For example, if you are trading off of a 200 Moving Average and it has
worked for a period of time then stops, where did the entry move to. Do we hunt
for the next new perfect Moving Average? No, because you won’t find it and if
you do it will be for only a certain period of time. What we do, is look at the
data. Have prices gone through the MA slightly and to what extent before
reversing?
I am not a proponent of Moving Averages but the point
here is that accurate statistical data of the system you are using will improve
whether you take a signal, where you take it, to what extent you will allow it
to draw down, and when you will get out or take some profit.
Last, “The trade
should be in the major trend direction. It should not have wild gyrations. If
possible there should be a nearby support area to provide a reasonable stop. It
should be rated high on the COT. (Commitment of Traders.)”
This is a key concept that needs to be kept in mind. You
will find it hard to go upstream. There are many who try and they can make a
case for it, but to me it is like trying to drive from Chicago to Atlanta on
the wrong side of the super highway. You might make it, but the disadvantages
may far outweigh the advantages.
