Richard Donchian: Life, Trading Guides and the Donchian Channel

Richard Donchian (1905 to 1993) is the trader credited with turning trend following into a system: he ran Futures, Inc., a pioneer publicly held commodity fund founded on diversification, wrote a weekly trend newsletter for 19 years and gave his name to the Donchian channel. His most useful legacy for a trader today is a short list of rules he first compiled in 1934, which put loss limits ahead of every other rule.

Who Richard Donchian was

Donchian was born in Hartford, Connecticut, in September 1905 and graduated from Yale in 1928 with a degree in economics. He joined the family's oriental rug business, but reading Reminiscences of a Stock Operator, the book about Jesse Livermore, pulled him toward the markets. He lost money in the 1929 crash, an experience that convinced him that "only the chartists made sense and money", in the words of a 1978 profile. He wrote his first market letter in 1930, at 25, and became a securities analyst at Hemphill, Noyes & Co. in 1933.

After serving in the invasion of Sicily and as an Air Force statistical control officer at the Pentagon, he worked as an independent adviser. In 1948 he turned from securities to commodities and created Futures, Inc., a publicly held fund built on diversification across markets, an idea new in the field. In 1960 he joined Hayden Stone as Director of Commodity Research and started the weekly "Commodity Trend Timing" letter, which he wrote for 19 years. He earned the CFA charter in 1963 and died on April 24, 1993.

Donchian's trading guides of 1934

Donchian compiled his "Twenty Trading Guides" in 1934 for stock traders. He found a complete copy again in 1966 and judged that most of them applied to commodities as well; a 1978 article by a Shearson Hayden Stone colleague republished all 20, split into 11 general guides and 9 technical guides. The table summarizes the general guides in our words; guide 3 is quoted because Donchian marked it as overriding all the others.

Guide 7 is pure arithmetic. A short sold at 50 and covered at 25 makes 50%; a long bought at 25 and sold at 50 makes 100%, on the same price swing. A short can never make more than 100%, while a long has no ceiling, which is why Donchian favored the long side when both directions looked equally likely.

The nine technical guides deal with chart reading: a sideways range often precedes a move of similar size in the same direction, old highs and lows act as resistance, trend lines that are repeatedly bumped tend to break, and breaks of minor trend lines against the major trend give the most important signals. Donchian considered entering in the direction of the move on the morning after a one-day reversal "a very valuable guide".

From his rules to the Donchian channel

Donchian traded with mathematical systems based on moving averages of prices. The channel that carries his name draws two bands: the highest high and the lowest low of a set period, originally 20 days, which is why the 20-day breakout is often called Donchian's four-week rule. A close above the upper band signals a new uptrend, a close below the lower band a new downtrend. It is a mechanical version of the breakout idea in the technical guides, combined with guide 3, since the opposite band gives a natural exit. Our Donchian channel guide shows how to plot and trade it.

On the chart, the upper line steps up only when a bar makes a new 20-day high, and stays flat otherwise; the lower line does the same with lows. On this window, 14 bars closed above the upper line for the first time; 6 of them closed back below the broken level within five sessions, while the April 9, 2026 breakout held until the first close under the lower line, on July 29. The channel cannot tell in advance which push will last, which is why guide 3 matters more than the entry: it tells you where you are wrong, not where price will go.

Why trend followers call him a founder

By 1979 or 1980, an observer at an early managed futures conference counted 19 commodity trading advisors running public funds and traced 16 of them back to Donchian, through direct employment or capital he had invested with them. Richard Dennis, who trained the Turtles, built on his trend following ideas but relied less on moving averages and more on money management; see our Richard Dennis profile and the Turtle Traders page. Breakouts as an entry method are covered in our breakout guide, and more profiles are in the famous traders section.