William Dunnigan − Market Master
William Dunnigan devoted much of his life to technical analysis and commodity markets. He was a highly respected researcher and published many papers outlining his findings.
His work, in the early 1950s, was based on chart formations. He understood the valuable role that fundamental analysis plays in stock analysis, but also understood that fundamental analysis, alone, was not the answer.
As he stated: “If the economists are interested in the price of beans, they should, first of all, learn all they can about the price of beans.”
(Dunnigan, W., Selected Studies in Speculation, Dunnigan, San Francisco, 1954, page 7.)
Dunnigan had a burning ambition to design a trading system which generated precise buy/sell signals and which was completely mechanical. His two best-known books, New Blueprints for Gains in Stocks and Grains (1956), in which he outlines an extensive range of technical principles, and One-Way Formula for Trading Stocks and Commodities (1957), which outlines his mechanical system, document the outcome of his highly successful journey.
Sadly, William Dunnigan passed away later in 1957 after the publication of his second very popular book.
New Blueprints for Gains in Stocks and Grains (1956)
In New Blueprints for Gains in Stocks and Grains, William Dunnigan discusses a wide range of technical topics. He is not only trying to educate readers, by giving them valuable insights, but he is also laying the foundation for his now famous one-way formula - his mechanical trading system.
The technical analysis topics he explored include: - The need for independent thought and decision-making.
- Dow Theory − its strengths and weaknesses, and a set of rules developed by a student of Dunnigan’s Samuel Moment.
- ‘The Square Root Approach’. Dunnigan notes that markets have meaningful actions and reactions around numbers that are squares, such as 4 (2 x 2), 81 (9 x 9) and 2,500 (50 x 50) and so on. This fact was first documented by W. D. Gann, and is the underlying principle of the square of nine, or Natural Squares Calculator.
- The concept of ‘thrust’, which is essentially a day or days when the range is much longer than the average of the previous days. Many researchers have subsequently explored this concept.
- ‘Good mechanical barometers’. This is arguably the most important topic covered in the book and is where Dunnigan outlines the signals that allow us to make buy and sell decisions in the market. These include ‘the Penetration of Bottom’, ‘the Closing Price Reversal’, ‘the Test of Top’ and ‘the Reversal Buy Signal’.
New Blueprints for Gains in Stocks and Grains is divided into four parts: - Part I - Little Lessons.
- Part II - Background to Trading.
- Part III - Blueprints for the Stock Market.
- Part Four - Gains in Grains.
One-Way Formula for Trading in Stocks and Commodities (1957)
William Dunnigan’s greatest discovery was his one-way thrust method. The method became very popular soon after it was published, and remains the basis of many trading systems today.
Dunnigan’s approach, like many other successful approaches, was to establish the direction of the longer-term trend, then to look for patterns that would signal a trade when a countertrend move was completed.
William Dunnigan looked at the relationship between two to three successive time periods. He called these ‘barometric movements’. His barometric movements were as follows:
An Up-Week - …both the high price and the low price this week are above the respective high and low prices of the preceding week.
A Down-Week - …both the high price and the low price this week are below the respective high and low prices of the preceding week.
An Outside-Week - …its high price is above the high price of the preceding week and its low price is below the low price of the preceding week.
A Long-Range Week - …[the bar] is followed by one or more weeks which are inside the range of this week - neither above nor below the Long-Range Week.
An Inside-Week - …its range is inside the range of the Long-Range Week.
(Mack, D. (Editor), Dunnigan, W., New Blueprints for Gains in Stocks and Grains & One-Way Formula for Trading in Stocks and Commodities, San Francisco, 1997, page 207.)
Dunnigan’s method firstly defined the trend. It then defined swing highs and lows in such a way that it allowed for market volatility. This ensured his method was adapted to the specific market conditions at the time.
His signals for taking trades were based on a range of proven charting patterns.
One-Way Formula for Trading in Stocks and Commodities is divided into two parts as follows:
Part I - One-Way Formula for Trading in Stocks - How to select stocks and chart prices.
- How to recognise barometric movements.
- A bird’s-eye view of One-Way Formula.
- Repeat Signals.
- Sell Signals.
- Recognising the main trend.
- How to recognise a possible change in the main trend.
- How to recognise a real change in the main trend.
- How to recognise a continuation in the main trend.
- How to engage in practical operations.
- Some practical considerations.
Part II - Trading in Commodities With One-Way Formula - Some special considerations in commodities.
- Operating plan in commodities.
Appendix: Dunnigan’s Coaching Reports.
Conclusion
There is little doubt that William Dunnigan had an enormous capacity for research. He would learn from those who came before him, looking for ways to improve on their legacy to us.
To a large extent he was driven by the desire to develop a profitable mechanical trading system. It was this process and its outcome that led him to writing two classic books immediately before his death.
William Dunnigan was, without any reasonable doubt, a market master.
neil@marketmasters.com.au
[This article was first published in the Australian Technical Analysts’ Association Journal, March/April 2004, and is reprinted with permission of the Australian Technical Analysts Association.]
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