Richard Donchian 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 was as economic trend
analyst and market letter writer for Shearson Hamill & Co. Quotes
from his "Market Outlook" letters appeared in the Wall Street Journal
and
other financial publications. He joined Hayden, Stone in 1960 and
becomes VP and Director of Commodity Research. He wrote numerous
articles including "Trend Following Methods in Commodity Price
Analysis." and published a weekly "Commodity Trend Timing" letter,
based on his 5-20 moving average method which 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 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 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% profit, whereas an advance from 25 to 50 will net 100%
8. In taking a position, price (limit) 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: A: 0n reaching levels at which in the
past, the commodity has fluctuated for a considerable length of time
within a narrow range B: 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 either 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.