Lessons from Richard Donchian – Best Trading Tips & Indicator

Famous traders

Lessons from Richard Donchian

Richard Donchian, the father of trend-following trading, was one of the world’s most successful traders. He was not just successful but an influential figure who passed away almost two decades ago but his trading ideas still resonate. In fact, his trend following and the technical trading system became the foundations for trading systems of trend followers of later years.

Richard Donchian was indeed a very prominent trader and still is noteworthy among traders in general. This is because he was an all-rounder. How so? Because he was a successful trader, an originator of the managed money industry, a teacher, a researcher, and a mentor. That said, Donchian deserves all the praise and accolades for his contribution to the betterment of the trader’s community. 

Are you among people interested in knowing about tips the legendary trader offered? And are you also interested in knowing all about Donchian Channel Indicator? Then you are on the right platform at the right time. Because in this article, we are going to share with you a short Richard Donchian biography, his trading tips, and everything you need to know about Donchian Indicator. 

Richard Donchian’s short biography

Richard Donchian was born in September 1905 to an Armenian family who migrated to the United States of America. He graduated from Yale University with a Bachelor of Arts degree in economics in 1928. Donchian entered the family’s business of rugs. However, a book titled Reminiscences of a Stock Operator, a book about Jesse Livermore, made him highly interested in financial markets. 

Later on, Donchian became a securities analyst. He also worked as a private investment advisor and economic analyst. Donchian was an intelligent person and a quick learner. He soon realized that only chartists made sense and money. Donchian also developed a unique trading system named Trend Following. Moreover, he also contributed a lot to commodities trading. Simply put, Donchian served traders on numerous fronts including commodity trading. However, it is impossible to highlight his contributions in a few lines. 

Trading lessons from Richard Donchian

Richard Donchian was a genius who turned his $0.2 million investment into more than $18 million. He not only achieved remarkable success, but he also used to share his trading ideas with others. Therefore, it is important for all of us to take full advantage of what Richard Donchian shared with us. His trading ideas and tips are remarkably good and interesting. The most popular Richard Donchian trading tips and ideas are the following. 

1. Rational money management strategies

According to Richard Donchian, rational money management strategies must accompany trading strategies in general. Donchian himself followed conservative trade management rules. Modern traders can also achieve success by following principles of conservative trading strategies. 

2. Don’t immediately act on public opinions

Donchian warns traders about impulsively acting on widespread public opinions. Public opinions may well be wrong and even if correct, they often delay the movement. 

3. Maximize profits while minimizing losses

Donchian advises traders that their ultimate goal must be to maximize profits while minimizing losses irrespective of which trading system they use.

4. Go long in a bullish trend and go short in a bearish trend

Richard Donchian himself used to go long in bullish markets whereas go short in bearish markets. That is exactly what he suggests to his followers to follow.

5. Commit less during uncertain market conditions

Richard Donchian believes that keeping commitments light is better during uncertain market conditions. According to him, financial markets frequently present clearly defined moves to make profits with high commitments.

6. Observe the volume

Donchian also stressed observing volume during periods of inactivity and dullness. That means you should be keen on finding the direction in which volume increases and follow that direction. 

7. Judicious use of stop orders

According to Donchian, judicious and proper use of stop orders is the key to profitable trading. It helps you protect profits and limit your losses.

8. Invest in strong commodities 

Richard Donchian advises commodity traders to invest in commodities with a strong background and sell weak ones.

The Donchian Channel Indicator

Richard Donchian developed a very powerful indicator named the Donchian Channel Indicator. It is an astonishingly powerful indicator that can help you in many ways. The indicator has three parts to it;

  1. Upper band – the 20-day high
  2. Middle band – the average of the upper and lower bands
  3. Lower band – the 20-day low

It is important to note that the Donchian Channel Indicator comes with a default 20-day period setting. You can adjust the time period according to your own preferences. 

The Donchian Channel trading strategies

There are certain crucial Donchian Channel trading strategies. You should follow those strategies and should never blindly trade bands. The following are highly effective and useful trading strategies when using the Donchian indicator. 

Trading breakouts

Trading breakouts is the first noteworthy strategy when using the Donchian Channel Indicator. As you know, the market must break out higher to trend. Therefore, you can look for breakouts and trade to make significant gains. For example, you can go long when the price touches the upper band of the Donchian Channel Indicator. Moreover, if you enable yourself to do it consistently, you can catch and ride every trend in the market. 

Trail your stop-loss

Trailing stop-loss is another great Donchian Channel Indicator trading strategy. It empowers you to ride massive market trends. The strategy involves no target profits, no second guessing, and no exit even when feeling seriously uncomfortable. In other words, you have to honor your stop-loss in any case and exit only when it signals to close the position. So, how can you use the Donchian Channel Indicator to ride massive trends in the market? 

1. Use the lower Donchian Channel band to trail stop-loss. It is the first step to riding an uptrend. 

2. Conversely, use the upper Donchian Channel band to trail stop-loss. It is the first step to riding a downtrend.

Maximize your profits with the Donchian Channel Indicator

You can also maximize your profits with the Donchian Channel Indicator. How so? You can do it by capitalizing on the Donchian Channel to scale in your winning trades and maximize profits. Your plan will be:

  1. Firstly, always try to have open profits of at least 2R. It gives you the much-needed buffer to withstand the pullback in case the market goes against you. Contrarily, if you don’t have 2R open profits, you may lose more than your expectations. 
  2. Secondly, it must be your objective to scale in winners with reduced risk. You can use the Donchian Channel Indicator for this. It allows you to get an entry trigger upon breakout. The best strategy here is to scale in with 0.5R or even less. It enables you to withstand the pullback in a better way as well as make larger gains if the market moves in a favorable direction. 
  3. Finally, it is imperative to determine your exit point as well. Remember a crucial rule of Richard Donchian here – Protect profits and limit your losses by judicious and proper use of stop orders.
Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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