“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:
- 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.
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.
Why Donchian’s Story Is Foundational
The Forbes 1982 excerpt contains the most important detail in Donchian’s biography: he toiled for 42 years before his system began to click at age 66, and then traded for another two decades producing exceptional results. The conventional reading of this story is inspirational: persistence pays off. The correct reading is more specific and more useful: the principles he developed were always correct, but the markets and the infrastructure required to implement them at scale did not develop until later in his career.
Donchian’s system did not suddenly become more sophisticated when it began working. The principles, buy breakouts, cut losses, let profits run, were developed through those 42 years of pencils and graph paper. What changed was the institutional infrastructure that allowed systematic approaches to be implemented across multiple commodity markets simultaneously. The advent of managed futures as a regulated industry, the development of electronic data availability, and the growth of commodity pool operators all created the conditions in which Donchian’s approach could express its full potential.
Seykota’s MIT computer room story is the direct institutional link between Donchian and the Turtle experiment. Seykota reproduced Donchian’s results in the early 1970s, varied the parameters, confirmed that longer-term systems worked and shorter-term ones were eroded by transaction costs, and went on to become one of the most influential figures in systematic trend following. He trained Michael Marcus. Marcus influenced Bruce Kovner. Donchian’s article, read by a young MIT graduate, set this entire chain in motion.
The specific fact that Donchian’s intent was “not to forecast prices but to provide a simple, foolproof way to get onboard important trends” is the clearest available statement of the distinction between predictive and reactive technical analysis written before those terms were commonly used. Donchian understood in the 1950s what practitioners have been re-explaining ever since: the approach does not predict. It reacts. The simplicity is the design, not the limitation.
Donchian’s training of women traders at a time when Wall Street excluded them is worth noting beyond its historical interest. It demonstrates that the approach’s teachability was not dependent on Wall Street credentials or conventional market backgrounds. The same pattern is visible in Dennis’s Turtle experiment: diverse backgrounds, consistent results when the rules are taught and followed. Donchian understood this three decades before Dennis proved it empirically.
Frequently Asked Questions
Who was Richard Donchian and why is he important to trend following?
Richard Donchian is widely considered the father of systematic trend following. He developed the Donchian Channel breakout system and the weekly rule in the mid-20th century, establishing the core principles of buying price breakouts and cutting losses that underlie all subsequent systematic trend following approaches. His direct students include practitioners who influenced Ed Seykota, and his work was the specific catalyst for Seykota’s systematic trading research at MIT in the early 1970s. The lineage from Donchian through Seykota to the broader systematic trading community is the most direct available in trend following history.
What is the Donchian Channel and how does it work?
The Donchian Channel is defined by the highest high and lowest low of a specified lookback period, typically 20 days. A buy signal is generated when price breaks above the channel’s upper boundary, indicating a new N-day high. A sell or short signal is generated when price breaks below the lower boundary, indicating a new N-day low. The simplicity of this construction is its strength: it responds to actual price behavior, produces objectively defined signals, and can be tested across any market with historical price data. The Turtle system’s entry rules are directly derived from this framework.
Why did Donchian’s system not begin working until age 66 despite being correct earlier?
Because the institutional infrastructure required to implement systematic commodity trading at scale did not exist until the 1960s and 1970s. The commodity pool operator regulatory framework, electronic data availability, and the growth of managed futures as an institutional asset class all developed during that period. The principles Donchian had developed through 42 years of research were always correct. The conditions required to implement them at a scale that could generate significant returns developed independently of his work, and his age at implementation was coincidental to the timing of those institutional developments.
Trend Following Systems
Want to learn more and start trading trend following systems? Start here.
