A must Read for the Successful Trader Richard Donchian - A Trading Legend's Strategy Unveiled...
Richard Donchian was born in Hartford, Connecticut in September 1905 was born over 100 years ago and although the vast majority of traders have never heard of him yet, he is one of the most influential traders of all time and the father of technical trend following.
Many modern trend following systems, such as the Turtle Trading system, are based on his work and legendary trader Richard Dennis was a huge fan and Ed Seykota used him as an inspiration.
Richard Donchian didn't begin trading his successful trend following system until the age of 65. He started making large returns after that and continued to trade until into his 90s - showing your never to old to trade. While he operated mostly in the field of commodities his technical analysis is applicable to any market.
His 4 week trading rule system has been at the heart of many successful trading systems and is one of the simplest, easiest and most profitable ways to trade trending markets.
People tend to think complicated is better but the 4 week rule is simplistic but will get you on the right side of every profitable trend and help you make money.
Apart from the 4 week rule he did a lot of work with a five and twenty day moving average crossover signal system and used buy and sell rules using a weekly time period.
The following trading guidelines were first published in 1934 and there are applicable today as they ever were and are re-produced in their original format below:
1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
3. Limit losses and ride profits, irrespective of all other rules.
4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%
8. In taking a position, price orders are allowable. In closing a position, use market orders."
9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.
2. Reversal or resistance to a move is likely to be encountered:
- 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range
- On approaching highs or lows
3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.
4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.
5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.
6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.
7. Watch for volume climax, especially after a long move.
8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.
9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
His work has stood the test of time and you can still trade using the above rules as you could 100 years ago markets still move to the influence of greed and fear as they did 100 years ago and the above guidelines will never go out of date.