The Free code for the indicator and strategy is on the link below
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About Richard Donchian.
Richard
Donchian is often hailed as the "Father of Trend Following,"
a pioneer in the world of commodities and futures trading.
Born in 1905, his contributions to technical analysis and
trading strategies have left an indelible mark on the
financial markets. His most renowned innovation is the
Donchian Channel, a tool that has become fundamental in
trend-following strategies.
Donchian's career
began in the 1930s on Wall Street, where he initially worked
as a securities analyst. His keen interest in market trends
led him to develop systems that would later define his
legacy. One of his earliest achievements was the
establishment of Futures, Inc., in 1949, which was among the
first publicly managed futures funds, showcasing his belief
in diversification and systematic trading.
The
Donchian Channel, one of his signature contributions,
consists of three lines: the upper band based on the highest
high over a specified period, the lower band based on the
lowest low, and a median line that represents the average.
This setup helps traders identify breakouts, indicating
potential trend changes or continuations, making it a vital
tool for trend followers.
Donchian's trading
philosophy was centered around the principle that "trends
persist." This belief underpinned his development of trend
timing methods for futures investing. His approach was to
follow market trends rather than predict them, which was
revolutionary at a time when fundamental analysis dominated
market strategies.
His trading rules, (which are
disputed, as some say it was a 50 week high to enter long
and 40 week low to exit) notably the rules were
straightforward yet effective. This rule suggested buying
when prices reached a new 50 week high and selling when they
hit a new 40 week low. Despite its simplicity, this method
was found to be one of the most profitable systems in early
testing, highlighting the power of trend following.
Donchian also published "Donchian's 20 Trading
Guidelines" in 1934, which are still studied today for their
insights into market behavior. These guidelines emphasize
understanding market sentiment, volume, and the significance
of price consolidations, offering traders a framework to
interpret market movements with a disciplined approach.
His influence extended beyond his immediate circle
when he mentored some of the future giants in trading, like
Ed Seykota, who further refined and popularized trend
following. Donchian's methods were not only about making
profits but also about teaching discipline, patience, and a
systematic approach to trading.
Donchian's work
laid the groundwork for what would later be known as the
Turtle Trading system. His methods inspired Richard Dennis
to experiment with similar trend-following strategies,
leading to the famous Turtle Traders experiment where
Donchian's principles were taught to novices, proving that
these methods could be learned and systematically applied
for success.
While Donchian's strategies were
primarily focused on commodities, his principles of trend
following are applicable across various markets, including
stocks and forex. His ability to distill complex market
behaviors into simple, actionable strategies has made his
methods enduring in an ever-evolving financial landscape.
Richard Donchian's legacy is not just in the tools
and strategies he developed but in his philosophy that
markets move in trends and that these trends can be followed
with discipline and consistency. His work changed the
perspective from trying to predict market movements to
capitalizing on them as they occur, a lesson that continues
to resonate with traders around the globe. His teachings and
methods remain a cornerstone for anyone looking to
understand the art and science of trend following in the
markets.
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