The dots start far from price and converge as the move continues, controlled by an acceleration factor that increases each time a new extreme is made. When price touches the dot, the system reverses side.
It was explicitly designed as an exit tool for trending markets, not as an entry signal, and Wilder himself recommended pairing it with a trend filter such as adx.
Used alone it is poor. In sideways markets it reverses constantly, and the acceleration means it tightens most aggressively exactly when a trend is strongest, often stopping out of the best part of a move. It is a good illustration that a mechanical exit still requires judgement about regime.
Related: adx, supertrend, chandelier-exit, whipsaw, trend-following