Welles Wilder

1. Welles Wilder

J. Welles Wilder Jr. (born January 7, 1933) is an American engineer and self-taught technical analyst, widely recognized as a pioneering figure in the development of technical indicators used in financial markets. He is best known for creating several popular indicators, including the Relative Strength Index (RSI), the Parabolic SAR, the Average Directional Index (ADX), and the Volume Price Trend (VPT). Wilder’s work, largely outlined in his 1978 book, *New Concepts in Technical Trading Systems*, revolutionized the field of technical analysis, providing traders with tools to identify potential trading opportunities based on price action and volume. This article provides a comprehensive overview of Welles Wilder's life, work, and the impact of his contributions on modern trading.

1. 1. Early Life and Background

While specific details about Wilder's early life are relatively scarce, it’s known he possessed a strong mechanical aptitude and engineering background. He wasn’t formally trained in finance or economics. This outsider perspective proved crucial to his innovative approach to technical analysis. He developed his indicators through rigorous observation of price charts and a systematic, mathematical approach – characteristics of his engineering mindset. He believed that trading systems should be objective and rule-based, minimizing emotional decision-making. He didn’t come from a financial background; he *engineered* a system for trading. This is a critical point in understanding the genesis of his indicators.

1. 1. The Genesis of New Concepts in Technical Trading Systems

Wilder spent five years developing and backtesting his trading system before publishing *New Concepts in Technical Trading Systems* in 1978. He wasn't trying to predict the future; rather, he aimed to identify statistically significant patterns in market behavior that could be exploited for profit. He emphasized that his indicators were designed to work *together* as a system, rather than being used in isolation. He specifically designed his indicators to be used on daily price data, believing this timeframe provided the most reliable signals. He was deeply critical of fundamental analysis, arguing that it was inherently subjective and often lagged market movements. He championed a purely technical approach, focused on price and volume.

Wilder’s system wasn't about finding the "best" indicator; it was about creating a cohesive set of tools that, when used in combination, could provide a probabilistic edge to traders. He believed that a disciplined, systematic approach was the key to long-term success in the markets. His book is considered a foundational text for many technical traders, even today. He sought to create a system that could be applied to any market—stocks, commodities, futures, and even foreign exchange.

1. 1. Key Indicators Developed by Welles Wilder

1. 1. 1. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is arguably Wilder’s most famous creation. Developed to measure the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset, it oscillates between 0 and 100. Typically, an RSI value above 70 indicates an overbought condition, suggesting a potential pullback, while a value below 30 suggests an oversold condition, indicating a potential bounce. However, Wilder cautioned against relying solely on these levels, emphasizing the importance of confirming signals with other indicators and price action. Divergence between price and RSI can also signal potential trend reversals. The RSI is a momentum oscillator, meaning it measures the speed and change of price movements. [RSI Trading Strategies](https://www.investopedia.com/terms/r/rsi.asp) are widely used. [RSI Explained](https://school.stockcharts.com/doku.php/Technical_Indicators/Relative_Strength_Index) provides a detailed explanation. [RSI Settings](https://www.tradingview.com/script/jK6zWk2R/) discusses optimal settings.

1. 1. 1. Parabolic SAR (Stop and Reverse)

The Parabolic SAR is a trend-following indicator used to identify potential reversal points in the market. It’s plotted as a series of dots on the chart, either above or below the price. When the price is trending upwards, the dots appear below the price; when the price is trending downwards, the dots appear above the price. When the price crosses the Parabolic SAR dots, it signals a potential trend reversal. The indicator uses an acceleration factor that increases as the trend progresses, causing the dots to move closer to the price. This is designed to tighten the stop-loss as the trend matures. [Parabolic SAR Guide](https://www.babypips.com/learn-forex/parabolic-sar) illustrates its use. [Understanding Parabolic SAR](https://www.investopedia.com/terms/p/parabolicsar.asp) provides a comprehensive overview. [SAR Settings](https://www.tradingview.com/script/n2D879O4/) explores optimal settings.

1. 1. 1. Average Directional Index (ADX)

The Average Directional Index (ADX) is a trend-strength indicator. It doesn’t indicate the direction of the trend, but rather the *strength* of the trend. An ADX value above 25 typically indicates a strong trend, while a value below 20 suggests a weak or ranging trend. The ADX is used in conjunction with the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI) to determine the direction of the trend. When +DI is above -DI, it suggests an uptrend; when -DI is above +DI, it suggests a downtrend. [ADX Explained](https://school.stockcharts.com/doku.php/Technical_Indicators/Average_Directional_Index) provides a detailed explanation. [ADX Trading](https://www.investopedia.com/terms/a/adx.asp) outlines trading strategies. [ADX Settings](https://www.tradingview.com/script/qXjD9z0o/) discusses optimal settings.

1. 1. 1. Volume Price Trend (VPT)

The Volume Price Trend (VPT) is a volume-based indicator that attempts to measure the relationship between price and volume. It’s calculated by adding the change in price multiplied by the volume to the previous VPT value. VPT is designed to identify accumulation and distribution patterns, suggesting potential trend reversals. Like other Wilder indicators, it's best used in conjunction with other tools. [VPT Indicator](https://www.tradingview.com/script/XkYgK0Wv/) provides a visual representation. [VPT Explained](https://www.investopedia.com/terms/v/vpt.asp) outlines its calculation. [VPT Strategies](https://www.babypips.com/learn-forex/volume-price-trend-vpt) outlines trading strategies.

1. 1. Wilder’s Philosophy and Trading System

Wilder’s trading system wasn't just about the indicators themselves. It was about a comprehensive approach to trading that included:

• **Risk Management:** Wilder strongly emphasized the importance of risk management, advocating for the use of stop-loss orders to limit potential losses.
• **Systematic Rules:** He believed in following a set of pre-defined rules, eliminating emotional decision-making.
• **Backtesting:** He rigorously backtested his system on historical data to validate its effectiveness.
• **Confirmation:** He stressed the importance of confirming signals from multiple indicators before entering a trade.
• **Market Neutrality:** His indicators were designed to work in any market, regardless of its direction.
• **Daily Data:** He preferred using daily price data, believing it provided the most reliable signals.
• **Trend Identification:** His indicators were primarily designed to identify and follow trends. [Trend Following Strategies](https://www.investopedia.com/terms/t/trendfollowing.asp) are key.
• **Position Sizing:** Wilder advocated for proper position sizing to manage risk effectively. [Position Sizing Guide](https://www.schoolofpipsology.com/position-sizing/) provides a detailed explanation.
• **Avoiding Over-Optimization:** He warned against over-optimizing indicators to fit historical data, as this could lead to poor performance in live trading. [Overfitting Explained](https://www.quantstart.com/articles/overfitting-in-machine-learning/) explains the dangers.

Wilder’s system was designed to be a mechanical, objective approach to trading, minimizing the influence of human emotions. His goal was to create a system that could consistently generate profits over the long term.

1. 1. Legacy and Impact

Welles Wilder’s contributions to technical analysis are undeniable. His indicators are widely used by traders around the world and are incorporated into virtually every charting platform. His book, *New Concepts in Technical Trading Systems*, remains a classic and continues to influence traders today.

His emphasis on systematic trading, risk management, and backtesting has had a profound impact on the field. He helped to professionalize technical analysis, moving it away from subjective interpretations and towards a more scientific, data-driven approach.

While some of his specific recommendations, such as using only daily data, have been challenged over time, the core principles of his system remain relevant. Many modern trading strategies are built upon the foundation laid by Wilder. [Algorithmic Trading](https://www.investopedia.com/terms/a/algorithmic-trading.asp) incorporates his principles.

1. 1. Criticism and Considerations

Despite his significant contributions, Wilder’s work has faced some criticism. Some argue that his indicators are lagging indicators, meaning they confirm trends that have already started, rather than predicting them. Others point out that his indicators can generate false signals, especially in choppy or sideways markets.

It’s important to remember that no indicator is perfect, and all indicators should be used in conjunction with other tools and techniques. Wilder himself cautioned against relying solely on his indicators, emphasizing the importance of confirming signals and practicing sound risk management.

Furthermore, the market environment has changed significantly since 1978. Increased trading volume, faster communication, and the rise of algorithmic trading have altered market dynamics. [High-Frequency Trading](https://www.investopedia.com/terms/h/hft.asp) is a modern consideration. Therefore, it’s important to adapt Wilder’s indicators to current market conditions. [Adaptive Indicators](https://www.tradingview.com/pine-script-docs/en/v5/Technical_analysis/Adaptive_Moving_Average.html) are designed for this purpose.

1. 1. Further Exploration

• **Technical Analysis:** A broader overview of the field. Technical Analysis
• **Chart Patterns:** Recognizing visual formations on price charts. Chart Patterns
• **Candlestick Patterns:** Interpreting candlestick formations for trading signals. Candlestick Patterns
• **Fibonacci Retracements:** Using Fibonacci ratios to identify potential support and resistance levels. Fibonacci Retracements
• **Moving Averages:** Smoothing price data to identify trends. Moving Averages
• **Support and Resistance:** Identifying key price levels where buying or selling pressure is likely to occur. Support and Resistance
• **Trading Psychology:** Understanding the emotional factors that influence trading decisions. Trading Psychology
• **Backtesting Strategies:** Evaluating the performance of trading strategies on historical data. Backtesting
• **Risk Management Techniques:** Protecting capital and minimizing losses. Risk Management
• **Market Sentiment:** Gauging the overall attitude of investors towards a particular asset. Market Sentiment
• **Elliott Wave Theory:** A complex theory of market cycles. Elliott Wave Theory
• **Bollinger Bands:** A volatility indicator. Bollinger Bands
• **MACD (Moving Average Convergence Divergence):** A trend-following momentum indicator. MACD
• **Stochastic Oscillator:** A momentum indicator comparing a security’s closing price to its price range over a given period. Stochastic Oscillator
• **Ichimoku Cloud:** A comprehensive indicator that combines multiple elements to provide a complete view of the market. Ichimoku Cloud
• **Volume Spread Analysis (VSA):** A technique that analyzes the relationship between price and volume to identify supply and demand imbalances. Volume Spread Analysis
• **Harmonic Patterns:** Geometric price patterns that suggest potential trading opportunities. Harmonic Patterns
• **Japanese Candlesticks:** A visual representation of price movements. Japanese Candlesticks
• **Gann Theory:** A complex theory based on geometric angles and proportions. Gann Theory
• **Dow Theory:** An early technical analysis approach focusing on market averages. Dow Theory
• **Renko Charts:** A chart type that filters out minor price movements. Renko Charts
• **Heikin Ashi Charts:** A chart type that smooths price data. Heikin Ashi
• **Point and Figure Charts:** A chart type that filters out time. Point and Figure
• **Keltner Channels:** A volatility indicator. Keltner Channels
• **Donchian Channels:** Another volatility indicator. Donchian Channels

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners