Richard Donchian published his trading guidance in 1934 for the first time. Most of his guidelines are still useful the same as were practical during the golden age of technical analysis. This guidance is one of the first trend-following systems, which is based on two different moving averages. In fact, it was a cutting edge in the early thirties. This guideline divides into two sections: general and technical. In this article we are going to talk about Richard Donchian Trading Guidelines. These advices can be used either in cryptocurrency market or any other financial markets.
Richard Donchian trading guidelines; General guidelines
Be in doubt with others opinion
1- Be careful of buying when the majority are extremely bullish or selling when the mass is extremely bearish. Even if the majority be correct, extreme sentiment in one direction can result in a delay of a move.
Use trading volumes
2- Use the trading volume in order to recognize the next move of the price when the market prices trade in a narrow range with little volatility. If the volume is high and is increasing continuously, it means that the price is willing to surge. On the other hand, if the volume is high at the first, but begins to decline it means that a downtrend is going to begin.
Richard Donchian trading guidelines; Increase the profit and cut losses
3- Let your profits increase and cut losses. This guideline overrides all other guidelines.
4- When you are not certain about the market trend, decrease your trading volume. Trading losses reduce by focusing on solid and strong signals.
5- Do not take any position if a trend was in a same direction continuously for three days. Wait for a one-day return in order to boost the risk-reward ratio.
6- Use stop-losses to reduce losses. Stop-losses should be based on trading patterns. A stop-loss has a different structure for triangle pattern compare to head and shoulders pattern.
7- Percentage of profit is higher in an uptrend rather than a downtrend. For example, if the price of a stock declines from $50 to $40, it reduced for 20%. On the other hand, if the price of a stock surge from $40 to $50, it increased by 25%. As a result, it would be better to add to your position in an uptrend.
Use different types of orders
8- Use Limit Order when you are opening a position and use Market Order when you are closing it. Limit Order means to place a buy or sell order with a better price. It means that you should buy an asset with the current price or lower. Meanwhile, you should sell an asset at market price or even higher. Market Order also means to place a buy or sell order with the best price to have a quick and reliable trade.
9- Buy when a security is in an uptrend and trading volume is rising. On the other hand, sell when a security is in a downtrend and the trading volume is low.
Richard Donchian trading guidelines; Technical guidelines
1- When a sideway takes place after an uptrend, usually the trend will continue, which is equivalent to the first ascend. After the second price growth, analysts could expect a downtrend.
It would be the same for a downtrend as well. It means that if a sideway takes place after a downtrend, usually the price continues declining, which is equivalent to the first decline. In this case analysts can expect beginning of an uptrend.
The figure above shows the Ethereum price chart. According to this chart, a sideway took place for 35 days and then uptrend resumed. In addition, a price decline happened.
2- When a sideway takes place after a price growth and it continued to surge, price will decline. However, if an uptrend takes place after price decline, the highest price at second ascend after sideway will play the role as a future resistance. On the other hand, the lowest price at second decline after a sideway will play the role as a future support.
Richard Donchian trading guidelines; Trend Line
3- If the price fluctuates above an uptrend line, the price may surge again, On condition that the price declines and moves close to the trend line while trading volume is low. Meanwhile, if the price fluctuates below the trend line, it may continue declining, On condition that the price moves closer to the trend line while trading volume is low.
4- The main trend line shows the trend direction in long term. Small trend line also defines shorter trend. When the price is fluctuating on the main trend line (in an uptrend) the small trend lines (small downtrend lines) is being taken in order to recognize the price jump and buy signal. On the other hand, when the price moves below the main trend line (in a downtrend), the small trend lines (small downtrend lines) is being taken in order to recognize the price decline and sell signal.
5- Triangles are usually broken on the horizontal line (flat side). It means that ascending triangles are usually broken with a price jump, while the descending triangles are usually broken by price decline. However, when the triangle indicates accumulation or distribution, one should look after alternative criteria to recognize next coming trend.
6- In an uptrend, when the price is on the trend and declining until meet the main trend line, if the price could not successfully rise again and fluctuates on the main trend line, one should expect that main trend line has been broken and a bearish market is going to begin. If the main trend line touched for multiple times, it signals the high possibility that the line will have been broken.
Richard Donchian trading guidelines; Trading volume
7- Increasing in trading volume could be used as a signal to recognize the end of an ascending or descending trend. A long-term uptrend usually ends with an explosion in trading volume. Meanwhile, a long-term downtrend ends with an explosion in trading volume as well.
8- During an uptrend, take a long position (buy) after one-day decline (no matter how small the decline is) especially when the decline is on lower volume. On the other hand, take a short position (sell) after a one-day price surge (no matter how small the advance is) especially if the trading volume declines as well.
Richard Donchian trading guidelines; Conclusion
There are at least three major themes in this guideline. The first is that the direction of the main trend signals the position one have to take. It means that one should focus on a long position in an uptrend while focuses on a short position in a downtrend.
The second is that trading volume plays a significant role in analysis procedure. It means that the price movement in the direction of the main trend comes along with high trading volume. On the other hand, when the price is moving in the opposite direction of the main trend, trading volume should be low. Anyway, an explosion in trading volume signals the end of the main trend.
The third is that consolidations and trading ranges are important in chart patterns. When the price becomes sustainable for a long-time, it signals a reversal. In addition, it determines the future support and resistance levels. Conversely, when the price becomes sustainable for a short-time, it signals that trend will resume.