Help on Donchian's 20 Trading Guides

[mingworld]

Hi,

I am new to trading and technical analysis. I came across to Donchian's 20 Trading Guides on the internet. Some of the points that I found it is bit hard for me to comprehend (or comprehend correctly)

I was hoping anyone can help me to understand these rules better in the real life trading examples?

I am posting the first two rules here for initial assistance. Thanks in advance.

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
Q: Would anyone give me a example of this rule? Any comments on how to use this rule?


2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
Q: How do I judge? from the volume chart? or any other means?

Thanks a lot!


Ming

 

[nazzdack]

(1) When "big" news announcements occur, intra-day volatility can be large enough to whipsaw long AND short-position holders. It can be better to let the market settle down before doing anything. (2) If a market is in a sideways trading range, wait for the market to breakout one way or the other AND re-test the previously established range before believing a "true" breakout has occurred.

 

[Hook N. Sinker]

Quote from mingworld:

I am new to trading and technical analysis. I came across to Donchian's 20 Trading Guides on the internet. Some of the points that I found it is bit hard for me to comprehend (or comprehend correctly)

I was hoping anyone can help me to understand these rules better in the real life trading examples?

I am posting the first two rules here for initial assistance. Thanks in advance.

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
Q: Would anyone give me a example of this rule? Any comments on how to use this rule?


2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
Q: How do I judge? from the volume chart? or any other means?

Donchian's 20 Trading Guides:

http://bigpicture.typepad.com/comments/2006/08/donchians_20_tr.html

These are not trading rules, they are guidelines.

"Beware of acting immediately on a widespread public opinion." If lots of traders expect the price of something to increase and buy, who is left to buy the security at a yet greater price value?

"From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases". You may judge this from either charts or tables. I recall Jesse Livermore writing that he records price and volume values into tables and used the tables to guide his trading.

 

[Hook N. Sinker]

Quote from mingworld:

Some of the points that I found it is bit hard for me to comprehend (or comprehend correctly)

Perhaps you seek defined rules. Computer trading simulation software allows traders to specify specific rules and apply them to historic price and volume data.

 

[mingworld]

Quote from nazzdack:

(1) When "big" news announcements occur, intra-day volatility can be large enough to whipsaw long AND short-position holders. It can be better to let the market settle down before doing anything. (2) If a market is in a sideways trading range, wait for the market to breakout one way or the other AND re-test the previously established range before believing a "true" breakout has occurred.

It makes sense now.
Thanks.

 

[mingworld]

Quote from Hook N. Sinker:

Donchian's 20 Trading Guides:

http://bigpicture.typepad.com/comments/2006/08/donchians_20_tr.html

These are not trading rules, they are guidelines.


"From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases". You may judge this from either charts or tables. I recall Jesse Livermore writing that he records price and volume values into tables and used the tables to guide his trading.

Thanks for your reply. Yes, I know they are guidelines. But some of them I don't understand due to my limited knowledge of the stock market.

If lots of traders expect the price of something to increase and buy, who is left to buy the security at a yet greater price value?

Can you give me the answer? I guess the ones did not buy quick enough left to buy at greater price.

 

[mingworld]

Quote from Hook N. Sinker:

Perhaps you seek defined rules. Computer trading simulation software allows traders to specify specific rules and apply them to historic price and volume data.

Thanks for the reply.
I am not seeking the defined rules at this stage. I am trying to understand the wisdom.

 

[mingworld]

More help on the following guidelines please.

Seldom take a position in the direction of an immediately proceeding three-day move. Wait for a one-day reversal.
Does this mean: if I found a stock that I believe has some trading potential and by the time I noticed the stock it has advanced three-day move. And the wisdom here is to take it easy and wait for the pullback and it will happen?

A move followed by a sideways range often proceeds another move of almost equal extent in the same direction of the original move. Generally, when the second move from the sideways range has run its course, a countermove approaching the sideways range may be expected.
Does this mean that stock tends to have two moves and a pullback after two moves?

Watch for good buying or selling opportunities when trendlines are approached, especially on medium or dull volume. Be sure such a line has not been adhered to or hit too frequently.
Do he mean the trenadlines are the moving average?

Breaking of minor trendlines counter to the major trend gives most other important position-taking signals. Positions can be taken or reversed on stop at such places.
Does it mean that it is good to take profits when minr trendlines are broken. say 10-day moving average.


Triangles of either slope may mean either accumulation or distribution depending on other considerations, although triangles are usually broken on the flat side.
Is he talking about: Ascending Continuation Triangle Chart Pattern & Descending Continuation Triangle Stock Chart Pattern


Watch for volume climax, especially after a long move.
does he mean price is making new high and volume is getting lower? if this was observed, does it mean the trend reversal?


During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

does this mean buy on the next morning of a pullback?

 

[nazzdack]

Quote from mingworld:

More help on the following guidelines please.

Seldom take a position in the direction of an immediately proceeding three-day move. Wait for a one-day reversal.
Does this mean: if I found a stock that I believe has some trading potential and by the time I noticed the stock it has advanced three-day move. And the wisdom here is to take it easy and wait for the pullback and it will happen?

A move followed by a sideways range often proceeds another move of almost equal extent in the same direction of the original move. Generally, when the second move from the sideways range has run its course, a countermove approaching the sideways range may be expected.
Does this mean that stock tends to have two moves and a pullback after two moves?

Watch for good buying or selling opportunities when trendlines are approached, especially on medium or dull volume. Be sure such a line has not been adhered to or hit too frequently.
Do he mean the trenadlines are the moving average?

Breaking of minor trendlines counter to the major trend gives most other important position-taking signals. Positions can be taken or reversed on stop at such places.
Does it mean that it is good to take profits when minr trendlines are broken. say 10-day moving average.


Triangles of either slope may mean either accumulation or distribution depending on other considerations, although triangles are usually broken on the flat side.
Is he talking about: Ascending Continuation Triangle Chart Pattern & Descending Continuation Triangle Stock Chart Pattern


Watch for volume climax, especially after a long move.
does he mean price is making new high and volume is getting lower? if this was observed, does it mean the trend reversal?


During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

does this mean buy on the next morning of a pullback?

(1) SELDOM----Sometimes it's good, sometimes it isn't. This is for people who think they're buying "cheaply" in a rising market. A better guideline is to wait for 3 lower daily closes in a well-defined bullish trend before initiating a long position, vice versa in a bear market. (2) A MOVE-----If a market advances $10, retraces $5 and then advances $10, then what you're describing is "true". The important thing is to be able to identify markets that are on the verge of making the second advance. You also have to allow for a possibility that the second advance can be much larger than $10. (3) WATCH FOR----- The problem with trendlines is that they tend to be drawn incorrectly and arbitrarily, thereby creating bogus "targets". It's better to use prior price levels because those are "real". They tend to attract more resting orders too. (4) BREAKING OF----Re-read (3). (5) TRIANGLES-----The important thing to know about triangles is that they are continuation patterns in the direction of the trend that precede them. The "height" of the triangle is also the minimum magnitude of the expected breakout. The shape and orientation of the triangle are irrelevant. (6) WATCH-----Towards the end of a bull market, volume and volatility WILL be expanding. Volume climaxes, ideally, should occur at the exact top of a market. The aggressive buying that propelled the market higher has been exhausted. Whoever realizes this can now easily push the market lower because the only potential buying power is from short-position holders. This should lead to an eventual selling climax and reversal of events. (7) DURING---- Re-read (1).

 

[Hook N. Sinker]

Quote from mingworld:

If lots of traders expect the price of something to increase and buy, who is left to buy the security at a yet greater price value?

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Can you give me the answer? I guess the ones did not buy quick enough left to buy at greater price.

Nobody is left to buy at a higher price. We all own the stock. We all bought at about the same time. If nobody buys then the next price movement is likely down.