Donchian’s Trading Guides
Richard Donchian documented his trading guides in 1934. He reviewed them in 1974, noting the ones he felt were the more important, some 40 years after they were first documented. The more important rules are reproduced:
1. Beware of acting immediately on widespread public opinion. Even if it is 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 decreases.
3. Limit losses and ride profits, irrespective of all other rules.
4. Light commitments are advisable when a market position is not certain. Clearly defined moves are signalled frequently enough to make life interesting, and concentration on these moves to the virtual exclusion of others will prevent unprofitable whipsawing.
5. Seldom take a position in the direction of an immediately proceeding 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, limit losses and take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
7. In a market where upswings are likely to equal or exceed downswings, a 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 worth following more than moves in which rails lag.
11. A study of the capitalization of a company, the degree of activity of an issue and whether the issue is a lethargic truck horse like Consolidated Edison or a spirited, volatile race horse like Case Threshing Machine is fully as important as a study of statistical reports.