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  • Table of Contents
    • Overview
      • Why Analyze Securities?
      • Technical Analysis
      • Fundamental Analysis
      • Random Walk vs. Non-Random Walk
      • Asset Allocation and Diversification
      • John Murphy's 10 Laws of Technical Trading
      • John Murphy's "Charting Made Easy" eBook
      • Technical Analysis 101
        • TA 101 – Part 1
        • TA 101 – Part 2
        • TA 101 – Part 3
        • TA 101 – Part 4
        • TA 101 – Part 5
        • TA 101 – Part 6
        • TA 101 – Part 7
        • TA 101 – Part 8
        • TA 101 – Part 9
        • TA 101 – Part 10
        • TA 101 – Part 11
        • TA 101 – Part 12
        • TA 101 – Part 13
        • TA 101 – Part 14
        • TA 101 – Part 15
        • TA 101 – Part 16
        • TA 101 – Part 17
      • Irrational Exuberance
      • Cognitive Biases
      • Arthur Hill on Goals, Style and Strategy
      • Arthur Hill on Moving Average Crossovers
      • Multicollinearity
      • "The Trader's Journal" by Gatis Roze
        • Stage 1: Money Management
        • Stage 2: Business of Investing
        • Stage 3: The Investor Self
        • Stage 4: Market Analysis
        • Stage 5: Routines
        • Stage 6: Stalking Your Trade
        • Stage 7: Buying
        • Stage 8: Monitoring Your Investments
        • Stage 9: Selling
        • Stage 10: Re-Examine, Refine, Re-Enhance
        • Additional Reading
      • Bob Farrell's 10 Rules
      • Richard Rhodes' Trading Rules
      • Donchian Trading Guidelines
      • Why and How To Use Correlation
    • Chart Analysis
      • What Are Charts?
      • Support & Resistance
      • Trend Lines
      • Gaps and Gap Analysis
      • Introduction to Chart Patterns
      • Chart Patterns
        • Broadening Top or Megaphone Top
        • Double Top Reversal
        • Double Bottom Reversal
        • Head and Shoulders Top
        • Head and Shoulders Bottom
        • Falling Wedge
        • Rising Wedge
        • Rounding Bottom
        • Triple Top Reversal
        • Triple Bottom Reversal
        • Bump and Run Reversal
        • Flag, Pennant
        • Symmetrical Triangle
        • Ascending Triangle
        • Descending Triangle
        • Rectangle
        • Price Channel
        • Measured Move—Bullish
        • Measured Move—Bearish
        • Cup With Handle
      • Chart Types
        • Arms CandleVolume
        • CandleVolume
        • Elder Impulse System
        • EquiVolume
        • Heikin-Ashi Candlesticks
        • Kagi Charts
        • Renko Charts
        • Three Line Break Charts
        • MarketCarpets
        • Relative Rotation Graphs (RRG Charts)
        • Seasonality Charts
        • Yield Curve
      • Candlestick Charts
        • Introduction to Candlesticks
        • Candlesticks and Traditional Chart Analysis
        • Candlesticks and Support
        • Candlesticks and Resistance
        • Candlestick Bullish Reversal Patterns
        • Candlestick Bearish Reversal Patterns
        • Candlestick Pattern Dictionary
      • Point and Figure Charts
        • Point and Figure Basics
          • Introduction to Point & Figure Charts
          • Point & Figure Scaling and Timeframes
          • P&F Trend Lines
        • Classic Patterns
          • P&F Bullish Breakouts
          • P&F Bearish Breakdowns
          • P&F Signal Reversed
          • P&F Catapults
          • P&F Triangles
          • P&F Bull & Bear Traps
        • P&F Price Objectives
          • P&F Price Objectives: Breakout and Reversal Method
          • P&F Price Objectives: Horizontal Counts
          • P&F Price Objectives: Vertical Counts
        • Point & Figure Indicators
        • P&F Scans and Alerts
          • P&F Pattern Alerts
      • Chart Annotation Tools
        • Andrews' Pitchfork
        • Stock Market Cycles
        • Fibonacci Retracements
        • Fibonacci Arcs
        • Fibonacci Fans
        • Fibonacci Time Zones
        • Quadrant Lines
        • Raff Regression Channel
        • Speed Resistance Lines
    • Technical Indicators & Overlays
      • Introduction to Technical Indicators and Oscillators
      • Technical Indicators
        • Accumulation/Distribution Line
        • Alligator Indicator
        • Aroon
        • Aroon Oscillator
        • ATR Bands
        • ATR Trailing Stops
        • Average Directional Index (ADX)
        • Average True Range (ATR) and Average True Range Percent (ATRP)
        • Balance of Power (BOP)
        • Bollinger BandWidth
        • %B Indicator
        • Chaikin Money Flow (CMF)
        • Chaikin Oscillator
        • Chande Trend Meter (CTM)
        • CMB Composite Index
        • Commodity Channel Index (CCI)
        • ConnorsRSI
        • Coppock Curve
        • Correlation Coefficient
        • DecisionPoint Price Momentum Oscillator (PMO)
        • Detrended Price Oscillator (DPO)
        • Distance From Highs
        • Distance From Lows
        • Distance To Highs
        • Distance To Lows
        • Distance From Moving Average
        • Ease of Movement (EMV)
        • Force Index
        • Gopalakrishnan Range Index
        • High Low Bands
        • High Minus Low
        • Highest High Value
        • Linear Regression R2
        • Lowest Low Value
        • Mass Index
        • MACD (Moving Average Convergence/Divergence) Oscillator
        • MACD-Histogram
        • MACD-V
        • MACD-V Histogram
        • Median Price
        • Money Flow Index (MFI)
        • Negative Volume Index (NVI)
        • On Balance Volume (OBV)
        • Percentage Price Oscillator (PPO)
        • Percentage Volume Oscillator (PVO)
        • Performance Spread
        • Price Relative/Relative Strength
        • Pring's Know Sure Thing (KST)
        • Pring's Special K
        • Rate of Change (ROC)
        • Relative Strength Index (RSI)
        • Relative Volume (RVOL)
        • RRG Relative Strength
        • StockCharts Technical Rank
        • Slope
        • Standard Deviation (Volatility)
        • Stochastic Oscillator (Fast, Slow, and Full)
        • StochRSI
        • Traffic Light
        • TRIX
        • True Range
        • True Strength Index
        • TTM Squeeze
        • Typical Price
        • Ulcer Index
        • Ultimate Oscillator
        • Vortex Indicator
        • Weighted Close
        • Williams %R
      • Technical Overlays
        • Anchored VWAP
        • Bollinger Bands
        • Chandelier Exit
        • Double Exponential Moving Average (DEMA)
        • Hull Moving Average (HMA)
        • Ichimoku Cloud
        • Kaufman's Adaptive Moving Average (KAMA)
        • Keltner Channels
        • Linear Regression Forecast
        • Linear Regression Intercept
        • Moving Averages—Simple and Exponential
        • Moving Average Ribbon
        • Moving Average Envelopes
        • Parabolic SAR
        • Pivot Points
        • Price Channels
        • Triple Exponential Moving Average (TEMA)
        • Volume-by-Price
        • Volume-Weighted Average Price (VWAP)
        • ZigZag
    • Market Indicators
      • Introduction to Market Indicators
        • Market Indicator Dictionary
      • Advance-Decline Line
      • Advance-Decline Percent
      • Advance-Decline Volume Line
      • Advance-Decline Volume Percent
      • Arms Index (TRIN)
      • Bullish Percent Index (BPI)
      • DecisionPoint Intermediate-Term Breadth Momentum Oscillator (ITBM)
      • DecisionPoint Intermediate-Term Volume Momentum Oscillator (ITVM)
      • DecisionPoint Swenlin Trading Oscillator (STO)
      • High-Low Index
      • High-Low Percent
      • McClellan Oscillator
      • McClellan Summation Index
      • Net New 52-Week Highs
      • Percent Above Moving Average
      • Pring's Bottom Fisher
      • Pring's Diffusion Indicators
      • Pring's Inflation and Deflation Indexes
      • Pring's Net New High Indicators
      • Put/Call Ratio
      • Record High Percent
      • Volatility Indices
    • Market Analysis
      • Dow Theory
      • Sector Rotation Analysis
      • Intermarket Analysis
      • The DecisionPoint Chart Gallery
      • DecisionPoint Rydex Asset Analysis
      • Wyckoff Analysis Articles
        • Wyckoff Market Analysis
        • Wyckoff Stock Analysis
        • The Wyckoff Method: A Tutorial
      • Elliott Wave Analysis Articles
        • Introduction to Elliott Wave Theory
        • Identifying Elliott Wave Patterns
        • Guidelines for Applying Elliott Wave Theory
    • Trading Strategies & Models
      • DecisionPoint Trend Model
      • Trading Strategies
        • Bollinger Band Squeeze
        • CCI Correction
        • CVR3 VIX Market Timing
        • Faber's Sector Rotation Trading Strategy
        • Gap Trading Strategies
        • Harmonic Patterns
        • Hindenburg Omen
        • Ichimoku Cloud Trading Strategies
        • The 'Last' Stochastic Technique
        • MACD Zero-Line Crosses With Swing Points
        • Moving Average Trading Strategies
          • Finding Support and Resistance in Moving Averages
          • Guppy Multiple Moving Average: An MA Ribbon Designed to Tip the Market’s Hand
          • How To Trade Price-to-Moving Average Crossovers
          • Trading the Bounce: Finding Support and Resistance in Moving Averages
          • Trading the Death Cross
          • Trading Using the Golden Cross
          • Using the 5-8-13 EMA Crossover for Short-Term Trades
        • Moving Momentum
        • Narrow Range Day NR7
        • Percent Above 50-day SMA
        • Percent B Money Flow
        • The Pre-Holiday Effect
        • RSI(2)
        • Six-Month Cycle MACD
        • Slope Performance Trend
        • Stochastic Pop and Drop
        • Swing Charting
        • Trend Quantification and Asset Allocation
    • Index & Market Indicator Catalog
      • Advance-Decline Indicators
      • Cboe Indices and Indicators
      • CME Futures and Spot Prices
      • DecisionPoint Sentiment Indicators
      • Dow Jones Breadth Indicators
      • Dow Jones Global Indices
      • Dow Jones Select Indices
      • Dow Jones Titans Indices
      • Dow Jones US Indices
      • Economic Indicators
      • ICE Futures and Spot Prices
      • Intellidex Indices
      • MSCI Indices
      • New 52-week Highs and Lows for Exchanges
      • NYSE Arca Equity Indices
      • NYSE Equity Indices
      • Philadelphia Indices
      • S&P 500 Sector and Industry Groups
      • S&P GSCI Indices
      • StockCharts AD Percent
      • StockCharts AD Volume Percent
      • StockCharts Bullish Percent Index
      • StockCharts High-Low Index
      • StockCharts High-Low Percent
      • StockCharts Percent Above Moving Average
      • StockCharts Pseudo Symbols
      • StockCharts Record High Percent
      • StockCharts Theoretical Indices
      • US Treasury Yields
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On this page
  • Donchian General Guidelines
  • 11 General Guidelines
  • Nine Technical Guidelines
  • The Takeaway
  • Further Study
  • Original Guides

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  1. Table of Contents
  2. Overview

Donchian Trading Guidelines

20 trading guidelines developed by Richard Donchian, the father of trend following.

PreviousRichard Rhodes' Trading RulesNextWhy and How To Use Correlation

Last updated 10 months ago

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Donchian General Guidelines

First published in 1934, many of the 20 trading guidelines from Richard Donchian are as relevant today as they were during the golden age of technical analysis. Considered by many as the father of trend following, Donchian developed one of the first trend-following systems based on two different moving averages, which were cutting edge in the early thirties. Based on his experiences, Donchian developed 20 trading guidelines split into two groups: general and technical. The guidelines shown below have been paraphrased for a more straightforward explanation. The original guides are also shown in the bottom half of this page.

11 General Guidelines

1. Be careful buying when the crowd is excessively bullish or selling when the crowd is excessively bearish.

Even when the crowd is correct, excessive sentiment in one direction or another can delay a move.

2. When prices trade in a narrow range with little volatility, look for a volume increase to confirm the direction of the next move.

Subsequent strength on higher volume is bullish, while subsequent weakness on higher volume is bearish.

3. Let your profits run and cut your losses short.

This guideline overrides any other guideline.

4. Trade in smaller amounts during times of uncertainty.

Trading losses and whipsaws can be reduced by focusing on solid setups and robust signals.

5. Do not chase a position after a three-day move.

Wait for a one-day reversal to improve the risk-reward ratio.

6. Use a stop-loss to limit losses and protect accrued profits.

Stop-losses should be based on the trading pattern at work. A triangle pattern will have a different stop-loss structure than a rising wedge or head-and-shoulders pattern.

7. Due to the law of percentages, long positions should be larger than short positions during a broad uptrend.

This assumes that the upswings will be larger than the downswings as a series of rising peaks and troughs evolves. A short position on a decline from 50 to 40 would produce a 20% profit, but a long position on an advance from 40 to 50 would make a 25% profit. The percentage gain on advances will be greater.

8. Use limit orders when initiating a position.

Use market orders when closing a position.

9. Buy securities that are in uptrends and show relative strength.

Sell securities that are in downtrends and show relative weakness. These two guidelines are subject to all other guidelines.

10. A broad market advance is more likely to continue when transportation stocks lead (Dow Transports).

A broad market advance is suspect when transportation stocks lag.

11. A security's capitalization, its activity level in the marketplace and its trading characteristics are just as important as its fundamentals.

The interpretation of this guideline is rather difficult because it is unclear what Donchian means with “capitalization”.


Nine Technical Guidelines

1. When it follows an initial advance, a consolidation (a sideways trading range) will often lead to another advance of equal proportions.

After this second advance, you can expect a counter move and decline back towards the consolidation. Similarly, a consolidation after an initial decline often leads to another decline of equal proportions. After this second decline, chartists can expect a counter move and advance back towards the consolidation.

2. A long sideways consolidation after an advance marks future resistance.

Expect resistance or a bearish reversal when prices decline and then return to this level. A long sideways consolidation after a decline marks future support. Expect support or a bullish reversal when prices advance and then return to this level.

3. Look for buying opportunities when prices decline to a trend line on average or low volume.

Conversely, look for selling opportunities when prices advance to a trend line on average or low volume. Be careful if prices stall around the trend line (hug) or if the trend line has been touched too often.

4. Prepare for a bearish trend line break when prices decline to a rising trend line, fail to bounce, and subsequently crawl along the trend line. Prepare for a bullish trend line break when prices advance to a falling trend line, hold most of their gains, and crawl along the trend line.

Repeated bumping of a trend line also increases the chances of a break.

5. Major trend lines define the longer trend. Minor trend lines define the shorter trend.

When prices are above a major trend line (rising), use minor trend lines (falling) to define short pullbacks and generate buy signals with upside breaks. When prices are below a major trend line (falling), use minor trend lines (rising) to define short bounces and generate sell signals with downside breaks.

6. Triangles are usually broken on the flat side.

This means an ascending triangle is usually broken with an upside breakout, while a descending triangle is usually broken to the downside. Chartists must look for other clues to determine if a triangle signals accumulation or distribution.

7. Look for a volume climax to signal the end of a long move.

An extended advance sometimes ends with a volume surge that marks a blow-off. Conversely, an extended decline sometimes ends with a volume surge that marks a selling climax.

8. Not all gaps are filled.

Breakaway gaps signal the start of a new trend and are not filled. Continuation gaps mark a continuation of the existing trend and are not filled. Exhaustion gaps mark a trend reversal and are filled. Chartists should not count on a gap being filled unless they can determine the type of gap, which is easier said than done.

9. During an advance, initiate or add to long positions after a one-day decline, no matter how small the decline is, especially when the decline is on lower volume. During a decline, initiate or add to short positions after a one-day advance, no matter how big the bounce, especially if the bounce is on lower volume.


The Takeaway

At least three themes emerge from these rules. First, the direction of the underlying trend determines position preference. Chartists should focus on long positions during an uptrend and short positions during a downtrend. Second, volume plays an important part in the analysis process. Price moves in the direction of the bigger trend should be on higher volume, while counter-trend moves should be on lower volume. However, note that volume climaxes can mark the end of an extended move. Third, trading ranges and consolidations are important chart patterns. Long consolidations can mark reversals and future support or resistance levels. Short consolidations often mark a rest in the ongoing trend.

Further Study

Thomas Carr's Trend Trading for a Living shows traders how to trade in the direction of the underlying trend. This hands-on book will also show readers how to configure a bullish and bearish watchlist to set your entry and exit prices.

Michael Covel's Trend Following introduces the fundamental concepts and techniques for various trend-following systems, including a system made famous by the Turtles. Additionally, Covel's book shows why market prices contain all available information. Readers will learn how to interpret price movements and profit from trend following.

Original Guides

General Guides:

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.

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

3. Limit losses and ride profits, irrespective of all other rules.

4. Light commitments are advisable when the market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting, and concentration on these moves will prevent unprofitable whip-sawing.

5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, limit losses, and take positions from certain formations, such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.

7. In a market where upswings are likely to equal or exceed downswings, heavier positions should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.

8. In taking a position, price orders are allowable. In closing a position, use market orders.

9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.

10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.

11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited racehorse is fully as important as a study of statistical reports.

Technical Guides:

12. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter-move approaching the sideways range may be expected.

13. Reversal or resistance to a move is likely to be encountered upon reaching levels at which, in the past, the commodity has fluctuated for a considerable length of time within a narrow range or on approaching highs or lows.

14. 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.

15. Watch for “crawling along” or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.

16. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stops at such places.

17. Triangles of ether slope may mean accumulation or distribution depending on other considerations, although triangles are usually broken on the flat side.

18. Watch for volume climaxes, especially after a long move.

19. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps, and exhaustion gaps.

20. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines.

Thomas Carr

Michael Covel

A version of Donchian's original guidelines can be found on the Trading Tribe website (). Ed Seykota is an original “market wizard” from Jack Schwager's book of the same name. He is a trend-following disciple who credits Richard Donchian as a major influence in developing his trading philosophy.

www.seykota.com
Trend Trading for a Living
Trend Following
Donchian Trading Guideline: When stock prices trade in a narrow range with little volatility, look for a volume increase to confirm the direction of the next move.
Donchian's Trading Guidelines: A broad market advance will likely continue when transportation stocks lead.
Donchian technical guideline: After an initial advance, a consolidation will often lead to another advance of equal proportions.
Donchian technical guideline: Major trendlines define the longer trend; minor trendlines define the shorter trend.
Donchian technical guideline: Volume peaks often signals the end of a long move.
Chart from StockCharts.com showing a breakout from a trading range
Chart from StockCharts.com showing that broad markets advance when transportation stocks advance
Chart from StockCharts showing Donchian's trading guideline, i.e., after an initial advance, the stock will often trade sideways after which it will advance of a proportion equal to the initial advance
Chart from StockCharts showing how a major trendline defines the longer trend whereas the minor trendlines define the shorter trends.
Chart from StockCharts.com showing how a significant increase in volume signals the end of a downward move