In , a very successful futures trader named Richard Dennis had a bet with another trader William Eckhardt on whether he could give a group of individuals a simple set of trading rules that would make them successful traders. The trading rules consisted of a trend following system and simple money management skills. It turned out that the experiment was an amazing success and some of the students went on to pursue trading careers.
You never know how high or low a market is going to move. Therefore, if you follow trends, you can catch some very profitable moves in the commodity markets. Buy on a pullback. If the market is in a clear uptrend, a good technique is to wait for the market to pullback before you go long in the market. Some simple strategies are to buy when the market goes down to touch a moving average or a clear trend line. Basically, any solid support level can be incorporated.
The theory is that support levels are often more likely to hold in uptrends and can be good buying opportunities. I like to use the 20 period moving average, strong trendlines and Fibonacci levels.
It is even better to enter the market when more than one of these support levels cluster at or near the same price. Many traders use this underlying strategy as their basis for trading. Make sure to use stop orders, but even these cannot eliminate all the risk.
Ed Seykota: Top Market Wizard and Trend Following Trader
Buy when the market makes new highs. You will likely not miss entering a trend this way. This is the hardest thing for many traders to do and that may be why it can be successful. This technique became popular with the Turtles, but it has evolved since and care needs to be taken when trading with this methodology. Some traders have been using this as a counter-indicator; this means they take the opposite side of the trade on new highs or lows.
In fact you will see some markets accelerate when new highs are made, but many times the market will reverse quickly after a new high is made. This approach has become common, thus the strategy requires some patience and good risk control.
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The fact is that many of the breakouts will fail or at least have quick reversals. Many traders get shaken out of their trades and then the market resumes its breakout. I recommend doing a lot of research and back testing to understand this strategy and how best to trade it. Again, there is no guarantee that trend following will make for overall profitable trading. However, in my opinion it helps with the odds if the strategies are well tested and traded.
You still have to control your risk and protect your profits. Sometimes catching a couple strong trends can make the year for a trader. You still must have patience to stay with the trend for as long as it lasts to maximize profits. There is also the issue of a very strong trend ending very quickly and sharply.
The news and technicals might still look good, but how do you know when to finally get out? Donchian and Armenouhi A. A degree in economics. Although he appreciated studying about and collecting oriental rugs, he became more interested in the financial markets after reading the book about Jesse Livermore, Reminiscences of a Stock Operator. After suffering personal financial losses during the market crash of , he began his study of technical analysis, believing that only the chartists made sense and money.
After the war he returned to the world of investments as a private investment adviser and economic analyst, remaining self-employed until In his focus changed from securities to the trading of commodities. He used a mathematical system based on moving averages of commodity prices. During this period, he authored numerous articles on both securities and futures trading. In he became associated with Hayden Stone Inc. Donchian was best known for his pioneer work in the field of commodity futures money management. He was a member of the Commodity Exchange, Inc.
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Was Donchian an overnight sensation? What patience and persistence! Like all of the other great trend followers, the importance of price was critical for Donchian.
Consider this excerpt from William Baldwin from a March, edition of Forbes :. It went up too fast.
Following Trends in Commodities Trading
He was never distracted from his system. Today, most people fixate on the new and fresh fast money idea of the day, yet I still find almost every word Donchian or Dixon wrote newer, fresher, and more honest than anything currently broadcast on CNBC. My favorite Donchian wisdom tackles an issue that people are still struggling with in Trading is trading, and the name of the game is increasing your wealth. This is of utmost importance to new traders, who are often told do your research.
This is good advice, but should be considered carefully.
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