Markets have experienced historic moves since July 2007. Oil, gold and wheat have soared straight up. Real estate for many has imploded on an epic scale - straight down. The stock market? Volatility in stocks seems to never stop. 300 up on the Dow, 300 down on the Dow and then repeat the cycle. There has been so much volatility on major stock indices around the world that people are becoming numb to it. There is an eerie feeling that the other shoe has yet to drop. People are scared. Recession? It appears we are headed there quick.

Those are the market facts. Those are some of the feelings you see in people. However, the situation has been made far worse by the media, specifically the financial media. The headlines coming from the TV, internet, and print pundits are enough to make the average person jump off a bridge when pondering their ever shrinking portfolio. It's not just that the media reports "facts". They spin those facts into the most horribly frightful facts imaginable:

"In the last seven months, policy makers have cut interest rates, injected money into the banking system and approved a fiscal stimulus package in an effort to keep the economy from slipping into a recession. Often, the moves seemed to work at first, only to be overtaken by more bad news."
- New York Times

"The wrenching changes being wrought by a falling Humpty Dumpty economy, largely created by credit, and a swooning stock market, kited by leverage, are everywhere evident. Housing foreclosures swirled up to an all-time high of 0.83% of all mortgages nationwide. Over 5.8% of homeowners were behind in their mortgage payments, the largest number in upwards of two decades. House prices lost a staggering 8.9% in 2007 as a whole (and they're still tumbling)."
- Barrons

Those headlines and those numbers are serious problems for that part of the population who believes in buy and hold as religion and or owns a home worth less than their mortgage. Yet how do those headlines help anyone to buy or sell any asset and or determine how much of an asset to buy or sell based on their portfolio size? Answering those questions is the tough medicine needed to digg out of a hole.

But there is good news and it actually comes from a man long since deceased. Richard Donchian traded all types of markets. He was agnostic to the market 'name' (he did not care if it was a stock, commodity, etc.), he only cared if a market trended. Donchian knew that if he could find a way to get on board unpredictable market trends he could make money and keep himself from emotionally debilitating situations (i.e. like today's buy and holders or mortgage holders upside down).

Donchian developed a plan in 1934 (yes, that is the right year!) that he soon published as a set of guidelines. The majority of those guidelines are still relevant to every investor still in 2008:

1. Beware of acting immediately on widespread public opinion. Even if correct, if will usually delay the move.
2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
3. LIMIT LOSSES, ride profits - irrespective of all other rules.
4. Light commitments are advisable when a market position is not certain.
5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for one-day reversal.
6. Judicious use of stop orders is valuable aid to profitable trading.
7. In a market in which upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.
8. In taking a position, price orders are allowable. In closing a position, use 'market' orders.
9. Buy strong acting, strong background (markets) and sell weak ones, subject to all other rules.

Simple logic. Simple principles. Can you follow them? Still a skeptic? You want proof for today, for 2008? Dunn Capital, a hedge fund based in sleepy Stuart, Florida, is up +55% over the first 60 days of 2008. Dunn's basic philosophy is rooted in Donchian's guidelines from all those years ago. Other traders with similar 'trend' views of the world, the traders who are making fortunes as oil, gold and wheat make new all time highs, are up anywhere from +12% to +35% over the first 60 days of this year.

To make that kind of money when everyone else is getting buried is not easy. You need a systematic plan with rules that dictate when to get out of a market before you ever get in. Think about Google. Only a few months ago buy and hold investors were geniuses as they held Google (GOOG | Quote | Chart | News | PowerRating) as it soared to 750 a share. Now it is around 430. A 42% drop. Did it make sense to hold Google from 750 to 430? Probably not and that's what Donchian figured out all those years before there ever was an internet.

At the end of the day we are all human. We all have biases that make us weak and frankly stupid when it comes to making the right market decisions with our money. To make the big money, to avoid the bubble implosions, to avoid being part of the population glued to the TV scared to death of the next shoe to drop, overcoming our human nature is the name of the game. That's what Donchian's rules really did.

Source: Donchian guidelines from "Commodities", October 1978.

Michael Covel is the author of the bestselling Trend Following. His latest book, The Complete TurtleTrader, is the first complete look at Richard Dennis' famous turtle trading experiment. Covel has presented on the topic of trend trading and hedge funds from China to Japan to Europe to the United States. Covel is currently producing his first documentary film, an edgy look at investor behavior set for a 2008 theatrical release.