“It doesn’t matter if you’re trading stocks or soybeans. Trading is trading, and the name of the game is increasing your wealth. A trader’s job description is stunningly simple: Don’t lose money. This is of utmost importance to new traders, who are often told, Do your research. This is good advice, but should be considered carefully. Research alone won’t insure a profit, and at the end of the day, your main goal should be to make money, not to get an A in How to Read a Balance Sheet”
Quick facts about Richard Donchian:
- His account dropped below zero following the 1929 stock market crash.
- He began his market career as a stock analyst in the 1930s.
- Was one of the Pentagon whiz kids in World War II. Served as a cryptanalyst.
- Worked closely with Robert McNamara during his Air Force tenure.
- The intent of his trend following ideas was not to forecast prices but to provide a simple, foolproof way to get onboard important trends.
- Did not start trading his trend following system until age 65. Traded into his 90s.
- He personally trained many traders in the art of trend following. He trained many women at a time when women were second fiddle on Wall Street.
Donchian wisdom from 20 years ago is just as fresh today. Consider this excerpt from Forbes 1982:
For decades Donchian toiled over his price charts — first for stocks, later for commodities — hoping to hit on the magic formulas that would guarantee trading profits. After 42 years of pencils and graph paper, he was managing all of $200,000. Then, when he was about 66, his system began to click. Now, a decade later, he’s managing $27 million at Shearson/American Express, pulling down close to $1 million a year in fees and commissions and almost equaling that in trading profits on his own money… But Donchian loved Wall Street. In 1930 he persuaded a small Hartford broker to lend him some capital and a desk to trade shares in Auburn Auto, the Apple Computer of its day. Auburn eventually folded, but Donchian made a few thousand dollars on the strength of good timing. And thus was born a market “technician,” someone who charts prices and formulates buy and sell strategies with scant regard for an investment’s underlying, or fundamental, value.
Donchian’s influence was wide and far-reaching. In an interview Ed Seykota cited his influence:
Q. So how did you get introduced to technical analysis?
A. About the time I graduated from MIT, I read an article by technician Richard Donchian that intrigued me. That idea ? the idea of an automatic mechanical moneymaking machine ? fascinated me. So I bought some block time at a local computer service, spent my evenings punching up cards from The Wall Street Journal and began to reproduce Donchian’s results. I tried varying the parameter sets and found that other combinations also worked. I noticed that longer-term smoothing worked pretty well, while transaction costs seemed to chop up shorter-term systems.
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