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Richard Donchian's Trading Rules (Father of TrendFollowing)

Richard Donchian developed a plan in 1934 (no, that is not a typo) that he soon published as a set of guidelines. The majority of those guidelines are still relevant to every investor today:

  1. Beware of acting immediately on widespread public opinion. Even if correct, if 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, ride profits – irrespective of all other rules.
  4. Light commitments are advisable when a market position is not certain.
  5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for one-day reversal.
  6. Judicious use of stop orders is valuable aid to profitable trading.
  7. In a market in which upswings are likely to equal or exceed downswings, a heavier position 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 (markets) and sell weak ones, subject to all other rules.

 More information is available here: http://en.wikipedia.org/wiki/Richard_Donchian
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