VBM-ADX40 Method. (Wilder, J. Welles from Technical Analysis of Stocks and Commodities, February 1986.)

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2 VBM-ADX40 Method " I ve found that the most important thing in trading is always doing the right thing, whether or not you win or lose this is market savvy money management... I would go so far as to say that whether one makes money in the markets depends on whether or not one uses the proper money management how much you make depends on where you enter and exit the markets." (Wilder, J. Welles from Technical Analysis of Stocks and Commodities, February 1986.) Welles Wilder is one of my favorite technical analysts and above quote is spot on sure, it's obvious one but most traders fail to do the right thing and that's a fact. Forex trading is a game of odds, there are no certainties but if you play the odds correctly, you can make a lot of money. Those that seek perfection are in for a long and fruitless search but if you do the right thing, with sound money management you can enjoy success and using the ADX indicator in the way that were going to use it here,will increase the odds in your favor and it's very simple to understand and do. Here we are going to take our two VBM timing indicators (The Relative strength Index and the stochastic) and add the Average Directional Movement Index (ADX) as an additional indicator, to create a powerful combination which doesn't generate many trading signals but when a signal, is generated you will have a great low risk to high reward trading opportunity. We are only going to use one aspect of the ADX indicator which is incredibly simple and works and it doesn't just work in currencies but will work in ANY trending market. We will also give a quick review, of how Wilder intended the indicator to be used and some further reading which includes, one of my top ten investment book of all time - New Concepts in Technical Trading. Let's look at Welles Wilder, the ADX indicator and our simply system in more detail. Welles Wilder Trading Genius J. Welles Wilder stated his working life as a mechanical engineer, and remained an engineer for just seven years and in this time he was already investing successfully in the real estate market which he then did full time for a few years. His partners bought him out in the early 1970s and he commenced full-time technical market research and today, he is regarded as one of the most influential Technical anaylists of all time. He wrote three investment classics - The Adam Theory of Markets, The Delta Phenomenon and New Concepts in Technical Trading Systems. The latter book, is simply one all traders should read and while published back in the 1970s, the indicators and concepts outlined in the book remain as important today as they were then. In the book, Wilder created six indicators for use in trending and non-trending markets. All of these indicators were original and were designed as individual trading systems however the two which have achieved the greatest popularity are: The Relative Strength Index (RSI) and Average Directional Movement (ADX) These are included in every popular technical analysis software and we use the RSI as one of our main momentum indicators for timing trades. The ADX indicator and the 40 Rule

3 The ADX indicator is one of the best indicators to use to warn of major tops or bottoms and allows you to lock in profits if you have been trend following and also look for contrary trading opportunities. Wilder often said, he considered ADX his greatest achievement however it is an indicator which is not easily grasped by most traders. The way we are going to use it here is. The way we are going to use it is easy and you can at a glance, see when the right set up is presenting itself. You don't need to know how an internal combustion engine works, to drive a car and it's the same with the ADX line - You don't need to know the mathematical formula behind it to use it. For those of you of a technical nature, below is the calculation, for those of you not interested in the formula, just read the highlighted text! The calculation ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N Where: N the number of periods used in the calculation. The ADX indicator consists of three lines +DI (green), -DI (red) and ADX itself (black). When ADX is below 20, it shows the lack of a clear trend. Trend-following systems such as moving averages should not be used as they will give alternating buy and sell signals or "whip-saws" causing losses. When ADX crosses above the 20 line, it is time to employ trend-following systems. The ADX buy signal is given when +DI crosses above DI. I find the signal should generally be disregarded if +/- DI cross and re-cross in rapid succession. After a crossover, if the black ADX line crosses 20, it is a strong sign of an emerging trend. The sell signal is the reverse. Note this Point! When the ADX line reaches and moves above 40, it is warning that the currency is becoming overbought or oversold, when the ADX line peaks turns down from above 40 it's time to start banking profits (if you are trading the existing trend) or to start looking for contrary trading positions. How to Trade Turn Down's from Above 40 The market will of course be trending if the ADX line moves above 40, so using it to take profits is obvious as soon as the line turns down you can, you can look to lighten positions, exit the market altogether or tighten stops; now lets look at how to use it as a contrary trading tool. If you are looking at it as a contrary trading tool, check market sentiment and Net Traders Positions and see if there is a speculative extreme either bullish or bearish, as this will add weight to a counter trend argument. The ADX turn down from 40, can be used to confirm both market bottoms or tops and the way to use it is simple: As soon as the ADX line moves above 40 wait for a turn down and look at both the stochastic and RSI If the ADX line is above 40 chances are both will be overbought or oversold and normally, fall before the ADX line turns down. As soon as the ADX line crosses, the trading signal is validated. That's it nice and simple, now lets look at how effective it is and while you will see there are not many trades generated, the combination of a turn down from above 40 on the ADX, supported by RSI and the Stochastic can generate, some great trading signals as the following examples show:

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6 Comments You can use the ADX as an additional filter for your trading signals and you can run a portfolio of trades based upon this simple method and use it as a separate strategy. You don't get many

7 signals but the ones you do get are highs odds set ups and this method works across all trending markets currencies, stocks, interest rates and commodities. If the market trends, is volatile and has good liquidity you can use it. Wells Wilder remains a giant of technical analysis and I have been using his indicators for over 20 years and would urge any trader to check out his books which are outlined below. Best Sacha Further Reading If you are interested in reading more from Welles Wilder please find his books listed below and some quotes regarding his work which mark him out as one the true legends of technical analysis. "Over the years, Wilder has developed more accurate commodity trading systems and concepts than any other expert." FINANCIAL WORLD (July '85) "the premier technical trader publishing his work today." FORBES Magazine (October, '80) "In 1978, the basis of mathematical analysis was expanded when J. Welles Wilder, Jr. published New Concepts in Technical Trading Systems. BARRON'S (July '84) New Concepts in Technical Trading Systems. In the 1978s Then there was a quantum leap forward in technical analysis when J. Welles Wilder Jr. published his book, New Concepts in Technical Trading Systems. In this book Wilder published six technical trading systems. The three considered to be the most significant were the Directional Movement Index, the Parabolic Stop and Reverse and the Relative Strength Index (RSI). Writing this book established Wilder's reputation as one of the world's leading technical analysts. The Adam Theory of Markets The Adam Theory is about what makes a trader successful. This unusual book shows why the ideas possessed by many traders prevent them from being profitable traders. The book comes to a very simple, but vitally important conclusion about trading the Adam Theory. So what is the secret of the Adam Theory in terms of success? You may already know what it is but few traders realize its importance read the book for yourself and you will find out! The Delta Phenomenon or The Hidden Order in all Markets In the early 80's, Welles Wilder founded the Delta Society International. His purpose was to share the secret of the perfect order behind the markets. This order, the Delta Phenomenon, is the basis of all market movement relative to time.

8 Probably the least enjoyable work and a bit to mystical for me but a lot of people love it you will have to read it and decide for yourself! I hope you enjoy this simple twist on the VBM, I have used it for nearly 30 years now and it may be simple but it really can not only help you save money by giving you a profit taking signal, it can also alert you to contrary trades and confirm them s you have the confidence to trade against the majority and make some great profits with low risk. Good luck and good trading. This PDF is published by: