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:
- Beware of acting immediately on widespread public opinion. Even if correct, if will usually delay the move.
- From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
- LIMIT LOSSES, ride profits – irrespective of all other rules.
- Light commitments are advisable when a market position is not certain.
- Seldom take a position in the direction of an immediately preceding three-day move. Wait for one-day reversal.
- Judicious use of stop orders is valuable aid to profitable trading.
- 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%.
- In taking a position, price orders are allowable. In closing a position, use ‘market’ orders.
- 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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