Editorial Contributor
Richard Donchian The Father of Trend Following By Phil Seaton - ls trader In this month’s article we’re going to discuss a trader who has had a very large impact on trading and managed futures. He’s also known as the father of trend following. For those that don’t know, his name is Richard Donchian. Donchian is also well known amongst technical traders for his trend following systems, in particular his 5 & 20 moving average crossover system and his weekly breakout system. More on those shortly. Firstly, Donchian started the first publically managed futures fund in 1949, his firm was Futures, Inc. He is therefore considered by many to be the creator of the managed futures industry. He was, however, primarily focused on systematic trading and developing systematic approaches to futures money management. As happens with most who go down this path, he ended up believing that trend following was the optimal approach based on the results of his research.
He was so successful with his trend following approach that the Richard Davoud Donchian Foundation, which was formed after his death in 1993, is still giving away funds that Donchian’s systems made, to charitable causes. This shows two things: firstly, not only is trend following profitable, it has been for over 50 years. Secondly, and perhaps the biggest takeaway from this, is that simple systems work; primarily because they are more robust than other more complex approaches, and are certainly easier to follow. As mentioned above, he became known principally for two simple systems. The first of these was a simple moving average crossover system that used the 5 & 20 moving averages. The rules were, quite simply, to buy when the 5 SMA (simple moving average) crossed above the 20 SMA and the instrument in question is trading above both, and sell when the 5 SMA crossed below the 20 SMA and similarly the instrument in question is trading below both.
72 | www.financial-spread-betting.com | December 2012