Who is Richard Donchian?

Richard Donchian is regarded as the father of
trend trading.

He graduated from Yale with a BA in economics and began his Wall Street career in 1930. From 1933-1935 he wrote a technical market letter for Hemphill, Noyes & Co. For several years thereafter, he published a stock market service, "Security Pilot," and sold it to brokerage houses. During WW II he served as an Air Force statistical control officer with a group they called the "Whiz Kids." For two years after the war, he acted as economic trend analyst and market letter writer for Shearson Hamill & Co. Quotes from his "Market Outlook" letters appear in the Wall Street Journal and other financial publications. He joined Hayden, Stone in 1960 and became VP and Director of Commodity Research. He wrote numerous articles including "Trend Following Methods in Commodity Price Analysis." He published a weekly "Commodity Trend Timing" letter, based on his 5-20 moving average method and achieved a circulation of over 10.000.

Donchian's 20 Trading Guides
(First publication: 1934)

General Guides:

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 signalled 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 the 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 percent profit, whereas an advance from 25 to
50 will net 100 percent.

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.

Technical Guides:

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.