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Do Or Die

William Dunnigan's Methodology

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Dunnigan researched extensively on technical analysis before his major publication in mid-1950. However, similar to most other technical analysts in his era he was neglected because fundamental analysts largely criticized research on price behavior. The study of his methods may be interesting for traders who focus on Price Action based studies. His major publications are:

  • Selected Studies in Speculation, Dunnigan, 1954
  • New Blueprints for Gains in Stocks and Grains, 1956
  • One-Way Formula for Trading Stocks and Commodities, 1957

 

He initially published two systems- breakouts and n-day swings, but both underperformed the market even though the apparent net result was positive. He realized that there was nothing wrong in methodology, but the trading regimes simply did not favor them. His next system, the Percentage Wheat Method, combined a n% penetration and a 3-day swing, introducing the time element into his work and perhaps the first notion of thrust, a substantial move within a predefined time interval. With the n%, 3-day swing, a buy signal was generated if the price of wheat came within n% of the lows, then reversed and moved up at least an additional (n+0.5)% over a period of at least 3 days.

 

For Dunnigan, the swing method of charting represented a breakthrough; it allowed each market to cut down noise and develop its natural pattern of moves. He had a difficult time trying to find one criteria for his charts that satisfied all markets, or even all agro commodities. His research on percentage swings did not help. Swing method of charting refers to fixed range bar charts which are drawn 'independent' of time axis. He finally came up with Thrust Method which was fairly successful.

Dunnigan's Thrust Method:

 

Downswing is defined as a decline in which the current day's high and low are both lower than the corresponding high and low of the highest day of the prior upswing.

The reverse effect of having both a higher high and low would result in a change from a downswing to an upswing. The top and bottom of a swing are the highest high of an upswing and the lowest low of a downswing, respectively. It should be noted that a broadening or consolidation day, in which the highs and lows are both greater or both contained within any previous day of the same swing, has no effect on the direction.

 

In addition to the swings, Dunnigan defines the five key buy patterns:

1. Test of the bottom-where prices come within a predetermined percentage of a prior low

2. Closing-price reversal-a new low for the swing followed by a higher close than the prior day (similar to Engulfing Bull in candlesticks).

3. Narrow range-where the current day's range is less than half of the largest range for the swing

4. Inside range-where both the high and low fall within the prior range

5. Penetration of the top--by any amount, conforming to the standard Dow theory buy signal

 

For short selling, the above conditions are reversed.

An entry buy signal was generated by combining the patterns indicating a preliminary buy, with a thrust the next day confirming the move. The Thrust was defined as a variable price gain based on the price level of the market (similar to ATR multiple). Because of the risks, the market was asked to give evidence of a change of direction by satisfying two of the first four patterns followed by a thrust on the next day.

 

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Two key situations for repeat buy signals are:

1. A test of the bottom followed by an inside range (interpreted as market indecision)

2. A closing price reversal followed by an inside range

 

One-Way Formula

Based on his conclusions that the Thrust Method was too sensitive, causing more false signals that brought down the profitability, Dunnigan modified the confirmation aspect of the signal and made the Thrust into the preliminary signal. He also emphasized longer price trends which smooth performance could reduce signals.

 

With the upswing and downswing rules remaining the same, Dunnigan modified the Thrust to require its entire range to be outside the range of the prior day. For a preliminary buy, the low of the day must be above the high of the prior day. This is a stronger condition than his original thrust, yet only constitutes a preliminary buy. The confirmation occurs only if an additional upthrust occurs after the formation of, or test of a previous bottom. There must be a double bottom or ascending bottom followed by a thrust to get a buy signal near the lows. If the confirmation does not occur after the first bottom of an adjustment, it may still be valid on subsequent tests of the bottom.

 

For the One-Way Formula, repeat signals are identical to original confirming signals. Each one occurs on a pullback and test of a previous bottom, or ascending bottom, followed by an upthrust. Both the initial and repeat signals allow the trader to enter after a reaction to the main trend. The Dow approach to penetration is still allowable in the event all else fails. The refinement of the original thrust method satisfied Dunnigan's problem of getting in too soon.

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