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

  
  Education
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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 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. (more…)

Richard Donchian's 20 trading guides

  
  Education
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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 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. (more…)

Activity and Inactivity

  
  Education
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active-inactive

I’ve noticed that my trading is more and more characterised by periods of doing a lot of trading, followed by periods of doing nothing except watching.
This seems to be a positive thing, as the old days consisted of trading every day no matter what the conditions, where as now I find that the markets will go into a mode that I just do not like the look of. In such cases if I try to force something, to “find a trade”, then I’ll get burned for sure.
To some degree I think this is because I have not yet spent much time on developing my strategies for trading insides large consolidation patterns. Of course it gets easier as they become more developed but by that time they are also getting old, and in the past I start making good trades in them just as they are about to end. The hard parts to trade are the start of trends / end of consolidation, and the end of trends / start of consolidation. These are times when the market is changing its basic mode, and are great places to lose money.

Thoughts from Legendary Investors

  
  Education
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On Waiting…..

Wait for the fat pitch. – Warren Buffett: comparing investing to a baseball game where you can wait endlessly for the perfect pitch before you swing.

I only go to work on the days that make sense to go to work…And I really do something on that day. But you go to work and you do something every day and you don’t realize when it’s a special day. – George Soros talking to Byron Wien

His first conclusion was that he won when all the factors were in his favor, when he was patient and waited for all the ducks to line up in a row. – from Jesse Livermore, Worlds Greatest Stock Trader

Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed. …Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.- Gerald Loeb

You make money on wall street by being very selective and being patient, waiting for those opportunities that are irresistible, where the percentages are very heavily in your favor.- Seth Glickenhaus

Unless, however, we see a very high probability of at least 10 percent pretax returns (which translate to 6 percent to 7 percent after corporate tax), we will sit on the sidelines. With short-term money returning less than 1 percent after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.- Warren Buffett

Many equity investors feel compelled to remain 100% invested in equities at all times. Bond investors are often similarly constrained.  We strongly believe that this mentality leads to pursuit of relative rather than absolute investment returns, a direction we certainly want to avoid…A smaller pool of funds seeking to avoid meaningful declines in market value at every point in time and seeking more aggressive return objectives cannot afford to be fully invested in the absence of attractive opportunities. – Seth Klarman

On Mistakes….

…if anything, I make as many mistakes as the next guy. But where I do think that I excel is in recognizing my mistakes, you see. And that is the secret to my success. The key insight that I have reached is recognition of the inherent fallibility of human thought. –George Soros

The only way you get a real education in the market is to invest cash, track your trade, and study your mistakes! – Jesse Livermore

On Psychology… (more…)

Guidelines from Donchian

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