The first trade was profitable because it was made in the direction of the strong
trend. The next trades lead to losses as the market was turning up and down
without a clear direction. Profits made in the first trade would be taken back in
a series of losses.
How Donchian dealt with it was smart. He ignored all trading signals when the
red line was not going up on at least a 45 degree angle. He wouldn't take any
losing trades after the first trade because the red line is not trending at all. It is
in a so called choppy zone. So why was Donchian able to make a fortune from
such a simple system while others could not? Because others would throw this
system away as not profitable! The only “trick” was to follow a good trend and
not taking any other trades.
What is the lesson from this story?
If you know how to determine the market trend correctly, it could make a
difference between losing or break-even and winning. Donchian used a simple
moving average to determine the trend and filter trading signals.
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