Donchian rules

December 30, 2010

Richard Donchian is known as the father of trend following. His original trend following ideas form the basis for all trend following success that has followed. Below in an excerpt from an article written in 1995 about his 5 and 20 day moving average system:

Title: Donchian’s five- and 20-day moving averages.
Author: Richard Donchian
Publication: Futures (Cedar Falls, Iowa) (Magazine/Journal)
Date: November 15, 1995
Publisher: Oster Communications, Inc.
Volume: v24 Issue: n13 Page: p32: ISSN: 0746-2468

On Wall Street there are two conflicting adages:
1. “You’ll never go broke taking a profit.”

2. “Cut your losses short and let your profits ride.”

Experience has shown that in commodities trading, the first of these “old saws” is dangerous and misleading, while the second may well be regarded as the one lesson the inexperienced commodity trader should learn if he wishes to have a better-than-even chance to come out ahead.

Every well-designed, trend-following, loss-limiting method for trading in futures (or stocks) rests on the basic principle that a trend in either direction, once established, has a strong tendency to persist, at least for a time. Among the many trend-following approaches now in use are the Dow Theory, point-and-figure chart techniques, swing methods (other than the Dow Theory), trendline methods, weekly-rule methods and moving average methods. We’ll focus on moving average methods and, in particular, the comparatively simple five- and 20-day moving average method.

The Method
The rules for the five- and 20-day moving average method break down into two categories: general and supplemental.
General rules:


  • 1. The extent of penetration of the moving average is broken into units, depending on price level. For commodities selling over 400 (wheat, soybeans, silver), for example, a penetration of 40 cents is required (Donchian had six price classes in the days before interest rates and stock index futures).
  • 2. No closing penetration of the moving averages counts as a penetration at all unless it amounts to at least one full unit (39 cents in Rule 1 was not enough for penetration – it had to be 40 cents to count).
  • Basic Rule A: Act on all closes that cross the 20-day moving average by an amount exceeding by one full unit the maximum penetration in the same direction on any one day on a preceding occasion (no matter how long ago) when the close was on the same side of the moving average. For example, if the last time the closing price of cotton was above the moving average it stayed above for one or more days, and the maximum amount above on any one of the days was 64 points, then when the closing price of cotton moves above the moving average, after having been lower in the interim, a buy signal is given only if it closes above the average by more than 64 points (the unit in cotton is 0.10). This principle – the requirement that a penetration of the moving average exceeds one or more previous penetrations – is a feature of the five- and 20-day method that distinguishes it from other moving average methods.
  • Basic Rule B: Act on all closes that cross the 20-day moving average and close one full unit beyond (above or below, in the direction of the crossing) the previous 25 daily closes.
  • Basic Rule C: Within the first 20 days after the first day of a crossing that leads to an action signal, reverse on any close that crosses the 20-day moving average and closes one full unit beyond (above or below) the previous 15 daily closes.
  • Basic Rule D: Sensitive five-day moving average rules for closing out positions and for reinstating positions in the direction of the basic 20-day moving average trend are:
  • 1. Close out positions when the commodity closes below the five-day moving average for long positions or above the five-day moving average for short positions by at least one full unit more than the greater of a) the previous penetration on the same side of the five-day moving average, or b) the maximum point of any previous penetration within the preceding 25 trading sessions. If the distance between the closing price and the 20-day moving average in the opposite direction to the Rule D close-out signal has been greater within the prior 15 days than the distance from the 20-day moving average in either direction within 60 previous sessions, do not act on Rule D close-out signals unless the penetration of the five-day average also exceeds by one unit the maximum distance both above and below the five-day average during the preceding 25 sessions.
  • 2. After positions have been closed out by Rule D, reinstate positions in the direction of the basic trend a) when conditions in Rule D, point 1 above are fulfilled, b) if a new Rule A basic trend signal is given, or c) if new Rule B or Rule C signals in the direction of the basic trend are given by closing in new low or new high ground.
  • 3. Penetrations of two units or less do not count as points to be exceeded by Rule D unless at least two consecutive closes were on the side of the penetration when the point to be exceeded was set up.

Supplementary General Rules

  • 1. Action on all signals is deferred for one day except on Thursday and Friday, For example, if a basic buy signal is given for wheat at the close on Tuesday, action is taken at the opening on Thursday morning. The same one-day delay applies to Rule D close-out and reinstate signals.
  • 2. For signals given at the close on Friday, action is taken at the opening on Monday.
  • 3. For signals given at the close on Thursday (or the next to last trading day of the week), action is taken at the Friday (or weekend) close.
  • 4. When there is a holiday in the middle of the week or a long weekend, signals given at the close of sessions prior to the holiday are treated as follows: a) for sell signals, use weekend rules; and b) for buy signals, defer action for one day, as is done on regular consecutive trading sessions.

A word of caution
The five- and 20-day moving average method, and most other trend-following methods, for that matter, are not good to follow unless you are prepared to include in your program a sufficient number of futures to provide broad diversification. Risks are increased to an inordinate degree if you try to follow the method in one or just a few selected contracts.

The commodities that are in a pronounced trend and are not giving, new signals are frequently the ones in which the best results are attained. Therefore, in starting a new program it might be advisable not to wait for new signals but to take positions in the direction of prevailing trends in those not giving new activation advice. Because the markets are moving so wildly, however, it might be best to a) go in the direction of the trend only after one or more days of counter-trend movement, plus a day move in the direction of the basic trend, and b) to use an arbitrary stop on positions taken without waiting for new signals.

Remember, five and 20 days are not necessarily the best lengths for moving averages. And, most probably, the action rules themselves, as outlined above, could be refined and improved. Also, it may be that exponential moving averages, weighted moving averages, moving averages based on highs or lows or daily means, or some combination of all these, would produce superior results.

In this field of technical study it is probably safe to state that the beginning of wisdom comes when you stop chasing rainbows and admit that no method is perfect. When you find yourself willing to settle for any comparatively simple method that in tests over a long period of time makes money on balance, then stick to the method devotedly, at least until you are sure you have discovered a better method.


Richard Donchian worked at Shearson Lehman Bros. while developing his technical analysis and trend-following methods that today many traders use as the base of their systems. He also launched the first managed futures fund in 1948. Donchian died in 1993 at the age of 87.



Charlie Chaplin letter to his daughter Geraldine

December 24, 2010

Charlie Chaplin letter to his daughter Geraldine


My girl
Now it is night. One Christmas night. All unarmed wars in my little castle slept. Not awake or your brother or your sister. Even your mother now sleeps. Not only woke up zaspalite birds until he came to this polusvetla room.
I am far from you! But let oslepeya if even for a moment your portrait has disappeared from my eyes. It was here – on the table here – to my heart. But where are you? There – prikazniya in Paris, of the magnificent dance theater scene Shan h `Elize. I know that, like in a quiet night you hear footsteps, to see your eyes shining like stars in the winter darkness. I heard that your role in this party and light show is the role of Persian Beauty, captive from Tatar Khan. Be fair and dance. Be a star and siyay. But if vaztorzite and they thanked the audience intoxicated, if the flavor of flowers sent to you, they zamae, you sit in a corner, read my letter and listen to the voice of his father.
I am your father, Zheraldin!
I’m Charlie, Charlie Chaplin!
You know how many nights I sat by your bed for you to tell stories when I was small – the Sleeping Beauty for budniya dragon in the field … And when the dream comes to rest my eyes, I get him and says: “Go! I sleep with dreams of his daughter! “I see these dreams, Zheraldin see your future, today’s your day! I see a girl playing on the stage, a fairy dancing in the sky. I heard the crowd say: “See that girl? It is the daughter of the old fool. Remember how I said – Charlie? ”
Yes! I’m Charlie! I am old fool!
Today is your day. Dance! I dancing in a wide okasan and trousers, and you in silk dress of a princess. These dances and the sound of applause will sometimes rise in the heavens.
Go! Go there! But back on earth! And look at people’s lives, the lives of those street dancers in the final quarters to play hungry and shiver and beggary. I was like them, Zheraldin! In those nights, those Charming nights sleep in my talk, I stay awake. I saw your face, hit felt your heart and ask: “Charlie! Really this kitten will ever know? “You do not know me, Zheraldin … As I talk to razkazval those long nights, its story I never razkazval you … And it is also interesting … Story about a hungry fool who peeshe and dancing in the poor neighborhoods of London, and then … gathering alms … This is my story!
I vkusil hunger, I know what it means to be without a roof! Moreover, I felt pain of the humiliating skitnika poll in whose breasts Ocean raged all of pride, had a coin toss to drain. But nevertheless I am alive and live normally for a little talk.
Better to talk to you!
After your name, Zheraldin is my – Chaplin. It more than forty years I laugh people on earth. But I cried more than they are brave, Zheraldin! In the world in which you live, there is only dance and music!
At midnight, when leaving the great hall you forget richest fans, but do not forget to ask a taxi driver who takes home to his wife … And if brememnna if no money to buy a coat child, you put money in his hand. I told the bank to pay your these costs. But for others – you have to send the correct account! From time to time by subway or bus examine city walk se.Gleday people! And at least once a day said: “I am one of them!” Yes! You are one, my girl. More! Art before a human wings for excursions in visinite usually schupva his legs. And when the moment in which you feel yourself more than the audience, immediately leave the scene! Go with the first charges in the vicinity of Paris. I know them very well! … There you will see many dancers like you – even more beautiful than you, and more proud of you. Glare from the spotlight of your theater no clue! Projector is for them the moon. Look, look good! Do not dance better than you? Admit it, my girl! Always someone who dance better! And know – the family of Charlie no one was so rude to make a hack rugae or podigrae beggar, sitting near the Seine …
I will die, but you will live … I want you never to live in poverty! Along with this letter you send a white check. As you write to it. But when spending two francs, do not forget to say that the third coin is not yours. It must belong to nepoznatiya man who needs one franc. And it you can easily find. I want to see these strangers pauperism, you can find them everywhere. If you talk about money, do this because I know izmamnata force these devils … You know, I spent a long time in the circus. And I always bezpokoyal of twister. But I gotta tell you a true, my girl – making people more easily than solid ground than players of precarious rope. Maybe one night glory of the most expensive diamond will fraud. In the same night that your diamond will be unstable and fall rope you safe. Perhaps one day the beautiful face of a prince will fraud. On the same day you will be unversed twister, a twister neopitnite always fall … Not to sell my heart for gold and jewelry. For the largest diamond is the Sun. Fortunately he shine in the face of every man!
And when one day falling in love with a man, you all be with him. Your mom told you I write about it. She knows better love me, it applicable to her as you talk about it …
Your job is very difficult. I know that. Your body is covered only with a piece of silk. Because art can and will appear naked on stage, but to come back from there in wearing and cleaner …
But nothing and no one else in this world deserves to see even the nails of the feet of a girl. Nakedness is a disease of our time.
I am old and my words might sound funny. But me, your naked body must belong to one who loves Face your soul. It is not scary if your belief that is ten years from the time you go. Fear not – those ten years they will not sastaryat. But as it is, I want you to be the last person who is subject of the island of bare! …
I know that sons and fathers are always bivali in a duel. With me, fight with my thoughts, my girl. I love children subject. And before kapnat tears from my eyes on this letter, I believe – this is Christmas night, night of miracles. I want to become a miracle – you really know you all I want to tell you.
Charlie is already outdated, Zheraldin! Sooner or later, instead of white silk to the scene, you will have to wear black to go to my grave. Now I do not want to bother. Only from time to time look in the mirror, there will see me. My blood runs in your veins. I even when in my veins the blood dried up, not to forget his father – Charlie. I was not an angel, but as far as could be stremyah to be a man. Try it and you.


EUROZONE interactive graphs by REUTERS

December 22, 2010

Lunar cycle effects in stock returns

December 17, 2010

Interesting paper by Ilia Dichev and Troy D. Jane  –
University of Michigan Business School

Small-caps continue to outperform large-caps

December 16, 2010

Outperfomance of small caps which started in Sep is entering overbought conditions. Looking back we see that outperformance mode usualy lasts around 5 months and then correction is taking place. Will this time be different we gonna see.

PIIGS Unemployment trends

December 14, 2010

Unemployment trends in PIIGS countries are clearly on the upside. Spain and Italy are experiencing an acceleration of unemployment.

Source: Google

TBT – flirting with 200 DMA

December 13, 2010

Below is the daily graph of TBT -ProShares UltraShort 20+ Year Treasury (ETF) which is showing first signs of bullish trending behavior. As Yield of US 10 year Treasury note already above 200 DMA inflation theme is on full throttle. Any reading of weekly MACD above zero will make this ETF explode to the upside. Several closes above 200 DMA will bring the big trend investors so watch TBT !!!