Link: Donchian Trading Guide

Jan 28, 2008: 8:55 PM CST

Rudy at the Ticker Tape Trader recently posted a variety of rules from famous trader Richard Donchian, famous for his Donchian Channels trading system made famous by the Turtle Traders.

While I suggest you look at all the sample of guidelines, I thought I would highlight a few of them here:

“From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

Recall that Donchian was famous for his breakout type of trading system, and this guideline is in line with the famous principle “Price alternates between states of range expansion and contraction.”

Furthermore, A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move.”

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.”

As a trader who relies heavily on moving averages and trendlines, I found this principle particularly valid. While a trendline is more valid with a greater number of touches, eventually the line will break. Sometimes the break will be a stronger signal in opposition to the original trend trade.

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.”

Also, as a trader who frequently observes and trades triangles, I have found this to be true. Descending triangles (with a horizontal base) frequently break to the downside. Either way, any type of triangle is a type of consolidation pattern where price winds down to an equilibrium, and are often key signs of big money actions in terms of accumulation and/or distribution.

1 Comment

One Response to “Link: Donchian Trading Guide”

  1. anatrader Says:

    Corey

    I wish to add a caveat on Donchian Channel:

    Quote:
    The Donchian Channel works well in trending markets, but doesn’t work well in a sideways channel.

    The signals derived from the Price Channel are based on the following basic rules:

    * When price closes above the Donchian Channel, buy long and cover short positions.
    * When price closes below the Donchian Channel, sell short and liquidate long positions.

    The Donchian Channel indicator is not meant to catch tops or bottoms, only trends.

    Unquote