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How Did Richard Donchian Start Trend Following Trading?

“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”
Richard Donchian

Quick facts about Richard Donchian:

  1. His account dropped below zero following the 1929 stock market crash.
  2. He began his market career as a stock analyst in the 1930s.
  3. Was one of the Pentagon whiz kids in World War II. Served as a cryptanalyst.
  4. Worked closely with Robert McNamara during his Air Force tenure.
  5. The intent of his trend following ideas was not to forecast prices but to provide a simple, foolproof way to get onboard important trends.
  6. Did not start trading his trend following system until age 65. Traded into his 90s.
  7. 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.

His Influence

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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