Richard Donchian: Father of Trend Following Strategies

Richard Donchian is often referred to as the father of trend following strategies.

He developed the first trend following system, which he called the "40-week moving average rule."

Donchian's system was based on the idea that markets trend for extended periods of time and that by identifying these trends, investors can generate consistent profits.

He believed that by following the trend, investors could avoid the pitfalls of trying to time the market.

Donchian's system was revolutionary for its time, and it paved the way for the development of more sophisticated trend following strategies.

It's still widely used today by many traders and investors.

Richard Donchian was born in Hartford, Connecticut, in September 1905, to Armenian immigrant parents. He graduated from Yale University in 1928 with a B.A. degree in economics.

Donchian's early career involved working in the family's oriental rug business, but he soon became fascinated with the financial markets after reading Reminiscences of a Stock Operator. He began studying technical analysis and eventually joined Hemphill, Noyes & Co. as a securities analyst in 1933.

Donchian was a man of many talents, serving as an Air Force Statistical Control Officer in the Pentagon during World War II. After the war, he returned to the world of investments as a private investment adviser and economic analyst.

Richard Donchian was born in Hartford, Connecticut, in September 1905, the son of Samuel B. Donchian and Armenouhi A. Davoud, both of Armenian descent who migrated from Turkey in the 1880s.

He graduated from Yale University in 1928 with a B.A. degree in economics, after attending public schools in Hartford and the Taft School in Watertown, Connecticut.

Donchian entered the family's oriental rug business after graduation, but his interest in finance and technical analysis grew after reading the book "Reminiscences of a Stock Operator."

He began studying technical analysis after suffering personal financial losses during the 1929 market crash, and became a securities analyst and account executive with Hemphill, Noyes & Co. in 1933.

Donchian served in World War II, participating in the invasion of Sicily and later serving as an Air Force Statistical Control Officer in the Pentagon.

After the war, he returned to the world of investments as a private investment adviser and economic analyst, remaining self-employed until 1960.

Donchian created "Futures, Inc.", a pioneer publicly held commodity fund, in 1948, based on the principle of diversification, an idea new in the field at the time.

He developed a technical trading method called "trend following", which presupposes that commodity prices will move in long sweeps like bull and bear markets, and used a mathematical system based on moving averages of commodity prices.

Donchian authored numerous articles on both securities and futures trading, and was awarded a Chartered Financial Analyst degree from the Institute of Chartered Financial Analysts at the University of Virginia in 1963.

He was a member of various professional organizations, including the Commodity Exchange, Inc., the New York Cotton Exchange, and the American Statistical Association.

Donchian was selected as the first recipient of the "Most Valuable Performer Award" by "Managed Accounts Report" in June 1983, for his outstanding contributions to the field of commodity money management.

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Richard Donchian's legacy extends far beyond his own trading career. His students, who learned from him directly, went on to achieve great success in their own right.

Nelson Chang, Robert Crowell, and Barbara Dixon are just a few examples of Donchian's students who started their own trading firms. Chang-Crowell Corp and Spackenkill Trading are notable examples of the companies they founded.

Bruce Terry, who worked for Chang-Crowell Corp, is another notable student of Donchian's. These students demonstrate the impact Donchian had on the lives of those who learned from him.

Paul Dean and Brent Elam of TrendLogic highlight the importance of learning from experienced traders like Donchian. They emphasize that trading as a trend follower requires discipline and a willingness to learn new methods.

Donchian's students, such as Chang, Crowell, Dixon, and Terry, serve as a testament to the effectiveness of his teaching and the value of learning from experienced traders.

Richard Donchian's trend-following strategies are built around a simple yet effective concept: identifying and following market trends. He developed the Donchian Channels, a technical indicator that plots the highest high and the lowest low over a set period, typically 20 trading days.

This approach allowed traders to capitalize on market trends, radically changing how people approach investing. Donchian's strategy earned widespread adoption among traders across various markets.

The Donchian Channels proved a powerful tool in technical analysis, allowing traders to identify and follow market trends with ease.

The Donchian Channel is a trend-following indicator that helps traders identify trends, breakouts, and potential trading opportunities. It's a simple yet powerful tool that can be used in conjunction with other indicators and technical analysis techniques.

The channel is calculated by graphing the highest high and lowest low of the past N periods, and it's the region that lies between the upper and lower bands. The Donchian Channel can be used to identify both uptrends and downtrends, and it's especially useful for spotting trends and breakouts in the commodity market.

The Donchian Channel has several advantages, including trend recognition, breakout signals, dynamic support and resistance levels, and customizability. Traders can modify the time period to fit their trading preferences and style, and the channel's simplicity makes it easy to use and understand.

Here are some key benefits of using the Donchian Channel in technical analysis:

The Donchian Channel is a powerful tool in technical analysis, providing valuable insights into market trends and volatility. It's a trend-following indicator that helps traders identify both uptrends and downtrends.

The Donchian Channel can be used to detect trends, breakout trading, short-term trade setups, and support/resistance level analysis. This makes it a versatile tool for traders of all levels.

A bullish trend is indicated by the price being above the middle line of the channel, while a bearish trend is shown by the price being below the middle line. This relationship between price and the channel's middle line allows traders to determine the current market direction.

The Donchian Channel's breadth also reflects market volatility, giving traders the opportunity to modify their risk-management plans as necessary. This is especially useful for traders who want to adapt to changing market conditions.

Here are the main uses of the Donchian Channel:

The Donchian Channel's simplicity and clarity make it easy for traders to understand and incorporate into their strategies. It lessens uncertainty and emotional decision-making by visually presenting pricing channels and spotting breakouts.

Bollinger Bands are a technical analysis tool that plots standard deviation bands above and below a simple moving average. This means that the bands are not based on the highest highs or lowest lows like Donchian Channels, but rather on the volatility of the price movements.

The upper band is plotted at two standard deviations above the moving average, while the lower band is two standard deviations below. This gives you a visual representation of the price volatility and can help you identify overbought and oversold conditions.

The closer the prices move to the upper or lower bands, the more overbought or oversold the security is considered to be. This is because the bands are acting as a gauge for the price's deviation from its average.

A movement outside the bands suggests increased volatility, which can be a sign of a potential price reversal. The width of the bands also indicates the degree of price volatility, so the wider the bands, the more volatile the price is.