Trend Following Richard Donchian

October 20, 2009 | scorpion

Richard Donchian is one of the many stock investors and traders that lived through the Great Depression and stock market crash of 1929. Many of his ideas in trading are still viewed as important today and he was the father of the many trend following trading principles still in use today.

Biography

Donchian was born in 1905 in Hartford, Connecticut to Turkish parents. He graduated from Yale University in 1928 with a Bachelor’s in economics. Instead of jumping right into the financial industry he joined his parent’s business of Oriental rugs, studying and collecting them. His interests changed shortly after reading ‘Reminiscences of a Stock Operator’ by investor Jesse Livermore.

Like most other people of the time, Donchian lost money during the stock market crash. He became interested in the technical side of trading, studying and analyzing trading and believing that chartists made money as well as sense. He worked as the Vice President of his father’s Oriental rug business but also as securities analyst and account executive with Hemphill, Noyes & Company, which he joined in 1933.

Donchian served in the Air Force during the Second world war attack on Sicily, Italy. He continued his military career as a Statistical Control Officer for the Pentagon before returning to the investment industry as a private advisor and economy analyst. He worked for himself until 1960, switching from securities to commodity trading.

Futures, Inc., among the commodity funds which were first to be publicly owned, was started by Donchian. The fund was founded on the principle that diversification of stocks was important in order to be successful in the industry and he developed the trend following trading method. This method presupposed that the prices of commodities would move in long bull and bear patterns, based on a mathematical formula that took into consideration the moving average of commodity prices.

In 1963 Donchian received the Chartered Financial Analyst degree from the University of Virginia’s Institute of Chartered Financial Analysts.

Claim to Fame

Donchian’s claim to fame was his work in commodity futures and money management. He was also a part of a variety of organizations that dealt with stock trading and investing including but not limited to: New York Cotton Exchange; the New York Futures Exchange; the Commodity Exchange, Inc.; the National Association of Future Trading Advisors; and the American Statistical Association.

Why was he successful?

As the father of trend following, Donchian developed his own ideas on commodity trading. He used a mathematical formula to watch the moving average of stock indicator’s at the entry and exit points. He built his principles on this method.

One of Donchian’s followers includes Richard Dennis who built on the trend following method’s Donchian developed.

Publications

At this time there are no known books that have been published by Richard Donchian but there were many investment articles authored by him between 1940 and his death in 1993. Donchian was the author of the investment newsletter ‘Commodity Trend Timing’ for nineteen years.

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