Thursday, January 11, 2007
One of the oldest technical trading systems was Donchian's 4 Week Rule.
It was a 1950's trend following system of basically buying 4 week highs and selling 4 week lows. It took advantage of the fact that trends start with new long-term high's and low's.
Today's markets suffer from more volatility than in the past, and trend following systems are subject to whipsaws and large drawdowns. As a result, trend-following is one of the most advocated trading styles, but most traders can't handle it psychologically.
My stock trading system is not trend-following in its basic format (though it could be modified and used with stops - but that is for a future post ;-) ).
However, I traded futures for many years with a trend-following system.
If I had to go back to trend-following, I would make use of new high's and low's. However, I would also try and incorporate the fact that true trends continue to make new long term highs and lows, in quick sucession.
So, for example, if a new 4 week high is made, and a trend is under way, the 4 week high should be exceeded fairly quickly. Then, it should keep on being exceeded.
Here is a way that you could play it:
Buy(Sell) N-day highs(lows), and stop out if a new N-day high(low) does not occur in, for example, a week.
Now, this isn't a complete trading system and its not tested. Its just a different idea you may want to play around with.
Labels: Stock Trading