In the chart above, you see two indicators – the blue line and the red line. The
blue line is the indicator SMA 5 (stands for simple moving average with period
5)and the red line is SMA 20 (simple moving average with period 20).
Donchian's idea was very simple:
1. Buy when the blue line crosses the red line upwards
2. Sell when the blue line crosses the red line downwards
Even a 5-year old child could do this! Actually, there is nothing special about
this system. All trend following systems are like this. Some systems are more
advanced, with more sophisticated indicators, but the common approach is to
buy the dips and sell the rallies.
If everyone could do this, then what's the money making secret?
The answer is that Donchian used this system in strong bull markets. Yes,
trending markets! This important note is the key to consistent profits as
illustrated in the chart below.
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