Richard Donchian first compiled these “Twenty Trading Guides” in 1934 to help stock traders. He unearthed a complete copy of the rules again in 1966, and he found that most of them applied to commodities as well as to stocks & that all 20 of them had maintained their usefulness & validity. The “Twenty Trading Guides” will probably survive & prove valid for the next 75 years as well. They still make sense.
Richard Donchian General Guides:
- Beware of acting immediately on widespread public opinion. Even if correct, it will usually delay the move.
- From a period of dullness & inactivity, watch for & prepare to follow a Move in the direction in which volume increases.
- LIMIT LOSSES, ride profits- irrespective of all other rules.
- Light commitments are advisable when a market position is not certain. Clear defined moves are signaled frequently enough to make life interesting, & concentration on these moves to the virtual exclusion of others will prevent unprofitable “whipsawing”.
- 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 & to take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable & less Treacherous if used in proper relation to the chart formation.
- In a market in which upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons.
- In taking a position, price orders are allowable. In closing a position, use “market” orders.
- Buy strong acting, strong background commodities & sell weak ones, subject To all other rules.
- Moves in which rails (now the Transportation Index) lead or particular strongly are usually worth following more than moves in which rails lag.
- A study of the capitalization of a company, the degree of activity (a varying factor), and whether an issue is a lethargic truck horse or a spirited, volatile race horse is fully as important as a study of reports.
Richard Donchian Technical Guides
All 9 of these technical guides apply equally well to major & minor formations.
- 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 sideway range may be expected.
- Reversal or resistance to a move is likely to be encountered (a) on reaching Levels at which the commodity has fluctuated for a considerable length of time within a narrow range in the past or (b) on approaching previous highs or lows.
- 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.
- Watch for “crawling along” or repeated bumping of minor or major trend Lines & prepare to see such trend lines broken.
- Breaking of minor trend lines counter to the major trend gives most other important position-taking signals. Position can be taken or reversed on stops at such places. (This is possibly the most important of all the technical guides).
- Triangular of either slope may mean either accumulation or distribution, Depending on other considerations, although triangles are usually broken on the flat side.
- Watch for volume climax, especially after a long move.
- Don’t count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps & exhaustion gaps.
- 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. (This has proved to be very valuable guide).