Donchian Students Were Trained to Be Trend Followers

Barbara Saslaw Dixon, a student of Richard Donchian, offered in 1974:

Technical analysis is based on market action, or price. The theory derives from basic economics. The price of a commodity at any given time is determined by the supply, the demand, the general economic outlook, the weather, the political climate, the optimism or the pessimism of the population, and other factors. The technician looks only at the price, since by itself it represents one side of the equation and thus encompasses all other inputs. The technician mentally substitutes the words buy for demand and sell for supply. Thus, when corn increases in price, the technician says that buying – demand – is increasing and that the price is going up. The trend follower makes no attempt to forecast the extent of a price move. His basic tenet is that once a trend begins, it has a tendency to persist in the same direction for some time. He devises precise rules to determine what, to his mind, constitutes a trend and identifies the situation when a trend has finished or reversed. He then further disciplines his thoughts into a strict set of conditions for entering and exiting the market. He acts on these rules to the exclusion of all other market factors. In so doing, a trend follower removes, hopefully, emotional judgmental influences from his individual market decisions.

On Good Systems

“A good system is one that will keep you alive, keep your equity intact when there are no trends. The raison d’etre of any system is to insure that you are in the market when a trend establishes itself. The message is, don’t give up trend following, even after a string of losses. That’s just when the profits are due.”
Barbara Saslaw Dixon

On Prediction

“The successful trend follower doesn’t attempt to predict price moves, nor does he expect to be right every time. He hops on board according to his signal once a trend has begun, and he lets his profits run. He makes no attempt to forecast the top or bottom of a price move. He hopes, of course, that it will continue indefinitely. He expects to make money over the long run, but on individual trades he admits when he’s wrong and accepts many a [small] loss.”
Barbara Saslaw Dixon

TurtleTrader comment: Her wisdom is as fresh today in 2002 as it was in 1974.

On System Design

“When designing a system, I believe it’s important to construct a set of rules which fit more like a mitten than like a glove. On the one hand, markets move in trends, but on the other hand, past results are not necessarily indicative of future performance. If you design a set of rules which fit the curve of your test data too perfectly, you run an enormous risk that it will fizzle under different future conditions.”
Barbara Saslaw Dixon

On Curve Fitting

“Contemporary databases, software, and hardware allow system developers to test thousands of ideas almost instantaneously. I caution these people about the perils of curve fitting. I urge them to remember that one of their primary goals is to achieve discipline which will enable them to earn profits. With so many great tools it’s easy to change or modify a system and to develop indicators rather than rules, but is it always wise? I suggest they plan their research and conduct their studies in a systematic fashion. I remind them that systems and trading involve compromise – perfection is not achievable. Finally, I suggest they move slowly, that they look at trades on charts and not simply study printouts of hypothetical profits and losses.”
Barbara Saslaw Dixon

How to Handle Unexpected Events?

Barbara Dixon’s views on the unexpected:

Q. How is your systematic approach able to deal with unprecedented political and/or economic changes? A. The historical data that systems traders use to construct and test their trading rules contain then-unprecedented political and economic events which impacted prices. In general, the data lack labels such as January 31, 1990: Start of Gulf War or September 16, 1992: Collapse of EMS. The point of systems trading is that the impact of such events is always reflected in the price (whatever the market) and that systems traders need not struggle to react when such events actually occur; they simply follow their rules.

Trend Following Products

Review trend following systems and training:

Michael Covel Trend Following Products
Michael Covel Trend Following Products

More info here.