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Donchian Channel and other breakout methods

  • #1
  • First Post: May 28, 2009 5:51am May 28, 2009 5:51am
BREAKOUT!
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  • #2
  • May 28, 2009 5:58am May 28, 2009 5:58am
I have spent some time studying how to stay out of the market when it's consolidating.

I'm only interested in trading when the price is going to move. (Even if it is against me ).

The thing is this: there are several methods which work. Finding the one that fits my style of trading is key.

I remember reading some posts by Twoblink. Now he's an entertaining and sometimes irritating trader but we won't go into that. The fact is he knows the game and doesn't suffer fools. When he dropped a clue about Donchian channels I spent quite a bit of time studying them. Donchian channels go way back to Richard Donchian and were part of the original Turtle trading system.
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  • #3
  • Edited 6:17am May 28, 2009 6:06am | Edited 6:17am
Turtles spend weeks swimming for thousands of miles and get things done. This style of trading is not for me so I have been looking at Donchian channels on the 1 hour chart. Interestingly they plot all recent support and resistance levels quite accurately. I will post a chart soon.

At this stage I will also say this: Shoot me down in flames if you wish, but I would prefer informed input from seasoned traders. Back testing and tweaks, filters and widgets will all be looked at with interest.
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  • #4
  • May 28, 2009 6:21am May 28, 2009 6:21am
Attached Image (click to enlarge)
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I have highlighted the area of interest where the price is consolidating or deciding what to do for several hours. I used to try and trade in these areas. Don't even bother asking why, it's too painful to recount.
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  • #5
  • May 28, 2009 6:32am May 28, 2009 6:32am
Now have a look at the daily chart with support which Donchian channels have kindly drawn for us at 1.37 or thereabouts. Our area of interest is highlighted by the ellipse and is just above the support. So we probably want to go long?


Attached Image



Well, yes, but there's more if you can stand a beautiful thing being destroyed by my ideas...
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  • #6
  • May 28, 2009 6:36am May 28, 2009 6:36am
Moving averages, really, you make money with that stuff?

I don't know anything about Donchian Channels but wouldn't you do just as well with some simple trendlines on that chart? Looks like price is going up, trade the trendline or when it breaks out of consolidation, it's pretty easy to see when the trade is wrong so stops would be tight and just follow it up.

Maybe I'm making it too simple.....let's have some more indicators!
  • #7
  • May 28, 2009 6:46am May 28, 2009 6:46am
Let's get a few more dogs in here...
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  • #8
  • May 28, 2009 6:52am May 28, 2009 6:52am
Bollinger Bands are similar to Donchian channels but they are weird and curly and I'm not sure how they work. But something Bollinger Bands do is compress when the price is consolidating and signal a break out trade in the offing.

(is it nearly news time yet?)

I discovered that Donchian Channels do the same thing but, in my humble opinion, better. So here's a chart with some more indicators on it. To please pipmutt:
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  • #9
  • May 28, 2009 7:01am May 28, 2009 7:01am
Oh yes this works allright. I should repeat that this is just one of my strategies. I don't sit around waiting for the price to consolidate. It's just an observation...

Attached Image (click to enlarge)
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  • #10
  • May 28, 2009 7:07am May 28, 2009 7:07am
With the trend. I often use a 200ma to define the trend in any given time frame. I look at the height of the Donchian channel. In this case it compressesthe price within the range 13733 and 13825 which is our stop loss as well. A market order above 13733, say 5 - 10 pips.

ATR tells me if it has compressed enough to be a trade break out. If the channel is less than 3 times the ATR then it's compressed.

That's it. Simple.
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  • #11
  • May 28, 2009 7:17am May 28, 2009 7:17am
Forgot to mention that I use the lower DC as a trailing stop, also I set TP1 as 1:1, TP2 is 2:1, TP3 is the DC, contiguessnessing TS.
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  • #12
  • May 28, 2009 7:23am May 28, 2009 7:23am
Can't knock it if it works for you, clearly defined entries, stops, and exits, nice risk:reward, what more could you ask for!
  • #13
  • May 28, 2009 7:34am May 28, 2009 7:34am
Yes I think it's good for what it does. Works on any pair with a reasonable spread and gets us out of the doldrums.

I tend to sit out the odd false break out until something happens or price action tells me. I'd be interested to know if closing everything on the next bar would be cheaper in the long run. I suppose a computer could do that?
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  • #14
  • May 28, 2009 7:40am May 28, 2009 7:40am
Quoting smikester
With the trend. I often use a 200ma to define the trend in any given time frame. I look at the height of the Donchian channel. In this case it compressesthe price within the range 13733 and 13825 which is our stop loss as well. A market order above 13733, say 5 - 10 pips.

ATR tells me if it has compressed enough to be a trade break out. If the channel is less than 3 times the ATR then it's compressed.

That's it. Simple.
Thanks, smikester, for bringing your method to us...

A question (s), if I may... (I really like breakouts....) you use 2 different ATR on your chart... if DC (wich is a derivative of MA's, If I'm not mistaken...) is less than 3 times of wich of your ATRs you consider it a consolidation?

Wich TF are you using it with better results?

Cheers!

Keep it coming, I'm really enjoying it!
Many share my views with me. But I don't share them with them...
  • #15
  • Edited 8:25am May 28, 2009 8:01am | Edited 8:25am
Quoting HouseTrader
(I really like breakouts....)

Cheers!
Well I use the larger figure of the two. The thing is ATR(200) gives us a characteristic range for the pair and ATR(14) will usually be smaller because we are in a consolidation. I use it a bit for setting stop loss levels with other strategies. I just think of it as average bar size for this strategy.

I have been experimenting with the H1 chart but I don't know any reason why it shouldn't be used on the H4 or D1.

Define a break out: This is where you could help me because research is needed with this strategy. It works most of the time but to be more consistently successful you have to be a good trader. To define the break out bar/s and improve the strategy.
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  • #16
  • May 28, 2009 8:29am May 28, 2009 8:29am
Quoting smikester
Well I use the larger figure of the two. The thing is ATR(200) gives us a characteristic range for the pair and ATR(14) will be smaller because we are in a consolidation. I use it a bit for setting stop loss levels with other strategies. I just think of it as average bar size for this strategy.

I have been experimenting with the H1 chart but I don't know any reason why it shouldn't be used on the H4 or D1.

Define a break out: This is where you could help me because research is needed with this strategy. It works most of the time but to be more...
Thanks, smikester! So, its a "si ne qua non" condition too. If ATR14 < ATR200 and DC < 3xATR, then we consider it a consolidation... correct me please if I'm wrong...

Well, breakouts... I see them only as 2 kinds... the "hit and run type" (I trade DIBS for some time, and have seen some of this kind)... price breaks the channel (whatever you use, fractals, DC, BB, lines) simply ignoring it and NEVER looks back... It's very hard to make a "safe" entry on this kind, cause you must have a pending order on the right spot, without really knowing if it will "hit and run"... The other BO I see is the break and re-test... price breaks the consolidation limit, usually closing OUTSIDE the channel, and then make some correction , and the channel acts now like a support/resistance... that gives some more time to evaluate and enter the trade.... well, that's how I see it. I prefer th 2nd entry type, but many times wasn't so patient to wait ans entered the 1st way...

Cheers!
Many share my views with me. But I don't share them with them...
  • #17
  • May 28, 2009 8:31am May 28, 2009 8:31am
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  • #18
  • May 28, 2009 8:43am May 28, 2009 8:43am
Quoting HouseTrader
So, its a "si ne qua non" condition too. If ATR14 < ATR200 and DC < 3xATR
Well those are the figures that seem to work. I just use whichever is the larger of ATRX3. If it's bigger than the channel then you're in.

Watch out for the next post (failure). I'd be interested in your comments.
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  • #19
  • May 28, 2009 8:49am May 28, 2009 8:49am
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  • #20
  • May 28, 2009 9:02am May 28, 2009 9:02am
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