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Beyond Pattern Identification

  
Analysis, Education
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What does it take to be successful long-term? Two observations:
“The most successful market participants find a limited number of patterns that have favorable odds of success and repeat the trading of these often, with moderate risk placed in any trade. They win by acting as the house, not as the gambler. They win by taking consistent bets and harvesting returns from favorable odds. They don’t win by making the big bets and big scores. There is remarkably little drama– surprisingly little wizardry–among those who sustain success in financial markets. In the words of Lopez de Prado, their trading desks are more like laboratories than the platforms of gurus. Diversification and disciplined execution explain much of their returns.” – Brett Steenbarger

“Investing is kind of a game of connecting the dots. The nice thing about it is the longer you are in the business, as long as you are intellectually curious, your collection of data points of dots gets bigger and bigger. That is where someone like Warren is just incredible. He has had a passion for investing for well over 70 years. He started by the age of 10 or 12. He keeps building that library of data, the ability to recognize patterns in data. Being a successful investor you need to be hungry, intellectually curious, interested, and read all the time. You need a certain level of randomness in order to connect things that might give you an insight into where a business is going in five years that somebody else might not see.” – Ted Weschler

Guidelines from Richard Donchian

  
Analysis, Education

Richard Donchian Trend System

  • Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
  • From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
  • Limit losses and ride profits, irrespective of all other rules.
  • 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.
  • Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
  • 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.
  • 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 profit.
  • In taking a position, price orders are allowable. In closing a position, use market orders.
  • Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
  • Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
  • 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.

 

Donchian and his Students

Richard Donchian left many students that still trade or run money management firms. A sampling of his students include: Nelson Chang, Robert Crowell, Barbara Dixon, Bruce Terry, Paul Dean and Brent Elam.
Bottom line, trading as a trend follower is a learned behavior. However, most people don’t want to think or learn about new methods. It takes discipline. But, if the students of Richard Dennis or the students of the Richard Donchian trend system don’t provide inspiration as to how important learning the right method is toward achieving success…well buy a mutual fund and shoot for 5% a year.

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