Donchian’s 20 Trading Guides (First publication: 1934) General Guides: 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% profit, whereas an advance from 25 to 50 will net 100% 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 (transportation) lead or participate strongly are usually more worth following than moves in which rails (transportation) 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. Technical Guides: 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. Reversal or resistance to a move is likely to be encountered 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range on approaching 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 and prepare to see such trend lines broken. 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. Triangles of ether 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 and 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.
I monitor over 25 systems I have bought or found through the years, "The Mystery System" by Peter Ann which is similar to Donchian, and Dave Reiter(broker and trader) also has one similar. I wait till any of 70 plus to go into huge drawdowns, like 90% of the worst drawdowns they have had, then I start taking all signals. I have different account for that and comes in either first or second every year of what I trade since 1998 when I started this. Keep trading it till I get 75% of last new equity highs then quit till next drawdowns. This is problem why many lose money when buying systems, they get into it at equity highs and then take hits. My way of trading them is like Dogs of the dow, every January 1st buy 4 of last years dogs in Dow Jones, which lost highest percentages, chances are they pay dividends and should make some comeback, I think it would be a good deal for those who need to be a bit conservative but want some exposure to stock market. It like buying a one year old car from Car rent agency, someone else took hit on depreciation.
re: "My way of trading them is like Dogs of the dow," I'm not sure if this is the way to go. Remember systems like the ones Long Term Capital Management employed...the drawdown actually wiped them out. Any system could start generating losses consistently and never come back due to changes in the market price structure or other factors. Beware of "toughing it out" with a system that has not yet been proven....you could end up like LTCM.
I ABSOLUTELY agree with you, you have to be prepared and back testing any system is way to go about what you trying to accomplish like finding out what the worst drawdown there is so it percentages exceeds that by 10 percent to hedge well like in 2008, you could eat 15% loss and then hedge by buying Put and do covered calls plus make dividends. Always needs a way to insure we don't have total loss, even well diversification can't be wide enough if market just tanks like 1929. And we could be close in next few years. Historical Performance Year Dogs DJIA S&P 500 2014 7.0% 7.5% 11.4% 2013 30.3% 28.1% 31.8% 2012 5.7% 7.3% 13.4% 2011 12.2% 5.5% 0.0% 2010 15.5% 11.0% 12.8% 2009 12.9% 18.8% 23.5% 2008 -41.6% -33.5% -38.5% 2007 -1.4% 6.4% 3.5% 2006 30.3% 19.1% 15.8% 2005 -5.1% 1.7% 4.9% 2004 4.4% 5.3% 10.9% 2003 28.7% 28.3% 28.7% 2002 -8.9% -15.0% -22.1% 2001 -4.9% -5.4% -11.9% 2000 6.4% -4.7% -9.2% http://www.money-zine.com/investing/stocks/dogs-of-the-dow/ One of the biggest problems of most is diversification is never enough, so many don't have enough emergency monies, stocks, checking, real estate, gold etc...most people in America is two paychecks from losing it all. I might add that I have over 250 systems I have gathered through the years and I only monitor 10% of them looking for drawdowns. Trend trading all seem to have at same times strong drawdowns, oscillating counter trend systems have different drawdowns.
Seems like the way to go is with a portfolio consisting of a combination of trend and counter-trend trading systems.
Well, on those that I follow, back testing them fifty years, they are good enough to stand on alone, and following all of them does give that approach and diversification.
You have 250 systems? Were you a member of Club 3000 back in the day? That was a club for systems traders. The name came from the fact that most systems tended to cost around $3k, which was a lot of jack in the 1980's.