Let's talk Donchian Breakouts

And one more thing...

Anybody that adheres to a set of rules for entry and exit is going to miss great trades, and get unlucky from time to time with losing streaks...

It only makes sense, because every system has strength and weakness. During the year, as you execute your trades, you are simply hoping that the market will give you a chart that matches your rule set.

But there is never a Holy Grail system, because every single trade has the potential for loss.

Plus, if you are trying to compound your winning trades, and get a nice parabola, every loss with a high equity curve and higher risk is going to knock your balance down further than the start of the previous winning trade. Without a substantial edge, your equity will head downward, even with a positive pip count at the end of the year.

This is why the risk averse trade a set number of lots every single trade, thus avoiding quick wipeout but also eliminating the opportunity for exponential compounding. Yet, they will have a positive return at the end of the year if they have a positive pip count.

When I talk to potential investors, they always say "What can I expect?"

And my answer is always, "Nobody knows!" The charts are a reflection of what the banks are doing based on real world current events. Wars, interest rate changes, China selling off Dollars for Euros, whatever....

So the answer is: "Every year the chart is different than any chart in any previous year, so there is never a guarantee the coming year's chart will result in profitable trades based on my strategy."


But I don't want to scare them off, so I close deals by showing that ATR is usually below a certain level for a pair, and that historically volatility is there, and that there is a propensity for my trades to be profitable. I ensure them of the risk that they are taking by having me execute these trades, and they deliver an investment suitable to their appetite for risk.

Hey tdion, i love to see traders trading anything oldschool,especially donchian break outs.

Are you using ATR for your stop ? If a trader can handle some volatility,they can get some good rewards. I think an ATR as high as 5 days is the best for stocks in a donchian style trade nowadays,because the market can have a lot more noise. I havent come to a firm number in forex because the leverage is different,but I would assume at least two? Any thoughts?

Think of me trading old school Donchian with a 2010 remix. I trade it is a completely different way than the turtles did.

And, I do not use ATR for exits, though I do have a TA setup that gets me in and out.

You have caught my eye, I have always admired your posts in the past before you disappeared. I am glad at having the opportunity to learn from you.

Is this not a contradiction>?

Is this not a generalisiation? Can you not compound the other way as well and lower lots after a loss? It works both ways.

EDIT: Tdion like what you've said here just these 2 things not sure what you mean.

No.
If you don't know how it is done, it sounds contradictory, literally.

Here is what he means:
If you ever go to the system section and look at a system you will get something like; enter here exit here. This is a static approach and you will continually lose money and never win.

In a dynamic market you must have a dynamic entry and exit. Let me explain; As a Professional trader, "literally" I have a mechanical exit. But this mechanical exit is a dynamic exit and not a static one.

Here is an example:
I have at least 6 different exit (10-12 in total)

 

1. If scenario A happens, I then exit
2. If scenario A turned into scenario B, I then exit
3. If scenario B happens, I then exit
4. If scenario B turns into scenario C, I then exit
5. If scenario A pushed to C, I then exit
6. What ever happens and it hits emergency level; no questions, no thinking, no excuses... I get the f*ck out

This is a dynamic exit, in a dynamic market. Literally, it is a mechanical exit. To a perspective of belief, lack of understanding, and limited comprehension... until it is explained, it sound hypocritical and contradictory when you say "have a mechanical entry/exit, yet also have a dynamic approach."

I can understand how frustrated Four kids with me, calling me bullshit and telling me I'm a hypocrite, when he doesn't understand, nor comprehend what I'm saying... it is like a magic illusion, until it is revealed to you.

And that's a crucial point my friend

Ah ok I know what he mean now sorry I misread the post. But still, no matter how many "dynamic" entries you have... Fact it they are all still mechanical and saying "enter here" "exit here". Are 4 mechanical entries/exits really any different than 1 mechanical e/e?

I think in the end its an elaborate mechanical approach regardless of "dynamics"

Anyway dont want to take the thread off topic but now its clear! Proceed!

BTW I too trade "dynamically" like this I have just never really thought about it this way.

Cheers

Sounds like great stuff! I've just finished researching the turtle strategy and I liked it alot! Only thing that bothers
me is that I think that it might be too late to start using the turtle strategy, I mean that it is propably overused. But I really can't prove
that as I have not done any research to support it. Just read somewhere that a guy tested it and it started to show lesser and l
esser profit for each passing year. Anyone heard anythin like this?

Well anyway getting back to the thread, I love the idea of remixing the turtle strategy and finding a new way to trade it!
Will start reading this over and over again and trying to come up with something. BTW, what sort of drawdown have you
experienced using your system? And have you at some point have many losing months in a row? I read that Russell Sands (original trutle)
had this one time a losing streak that lasted almost a year! Try to cope with that emotionally!

But I wish you good luck and please continue with this great thread!

Over 11 years of testing, 15,000 pips gained with no more than 1,000 pips drawdown at once. Losing months: have no idea. All years were positive returns.

Does anyone here know of any good links on the Donchian channel? Discussion forums, pdfs, articles are all welcome. I ran a google search on it and came away with nothing that I didn't know before. In addition to "Donchian channel" I ran "price channel" though google but that didn't help much either. CrucialPoint's simple, yet very elegant chart reminded me that I had once started developing a strategy around Donchian channels (that strategy never saw the light of day as something else came up). I now wish to pick up on that long lost journey. Right now I've got FF thread links (there are only a few, though), a few thin articles and the Way of the Turtle in pdf and mp3 format. Any and all additions will be appreciated.

You might want to talk to Bill Dunn about that. He has a strictly rule based system he has been trading for years with very good returns.

Here is a link to his WMA Fund performance.... WMA Fund

And yes losses are part of the trading game.... controlling those losses is part of a winning trading game.

Also here is a link to a purely mechanical system from a guy that got banned....... EUR/USD Only

Not sure where he is now or what he is up to but it seemed to work.

Yeah.... wouldn't want to actually do any real research.... just take some talking heads word for it.

Also this last year just would have been terrible for the turtle system.....

Nopes. That's because Mr.Donchian was not a marketer trying to promote his indicator

It is a simple concept (buy/sell at breakout). Of course, you just have to create your own strategy around it.

I've seen a further development of the Donchian channel around in the early 2000. Then it disappeared. It's kind of like 3dimensional Donchian channel. Instead of having just one channel (the old DC), there are actually 2 channels in the newer development.

One channel for the Bulls and another separate channel for the Bears. When the bulls and bears are at tug and war and neither are dominant, the channels aligns together. When one dominates, the channels separates and price would remain inside one of the dominating channel (bull channel for uptrend/bear channel in downtrend)

So, from this newer version you can actually spot ranging/consolidation against trending market conditions, which the old DC cannot do. There are hardly no delay. Once the two channels aligns, you're in a ranging/consolidating market condition. You know the trend is finished. When it separates, you're in a trending market condition.

I've never seen the indicator again.

Is there a Donchian Channel indicator for Metatrader platform. Thank you.

It's alright CrucialPoint. Having done some previous research and having had another look at your chart, I think I can manage without any outside resources. I'll have to put some work into it, but for me this is the definition of fun (I know, I'm weird). Thanks again for that chart, you have no idea how useful it was.

Something similar can be achieved by plotting DC with BB. I haven't done any extensive research but if you open a daily chart for fiber with default Donchian channels and default Bollinger bands you can see that each and every time the Bollinger bands consolidate as much as to fit inside the Donchian channels, you get a breakout that is good for quite a few pips. A divergence indicator is good for avoiding whipsaws.

I don't want to come off like a sour puss, but have you ever heard of Google? It does wonder for finding stuff online. You might want to try that first before asking for it. Nevertheless, when I was looking for this indicator myself a few days ago, I noticed that some of the versions found online were not quite the real deal (some of them had no shift option, some had problems with defining the high). So consider this your lucky day (in the future, please see google first, OK?).

I've posted two versions, both of them carry the alternate name price channel, but you can rename them to Donchian channel if you wish.
1) PriceChannel - doesn't have the middle band, shift is 1, default period 10
2) Price Channel Z - has the middle band, shift is 0, default period is 14

As I as I know, the default for the classic Donchian channel is period=20 shift=1 but I could be wrong about the shift. There are so few resources on this indicator that it's difficult to be sure.

Sounds like you really have hit the spot with your system! Congratulations! I hope that someday I will also be able to create a system like your's! How long have you been trading before you created this system?

So you've done the research? What do you mean with the EURUSD picture that you attached?

The chart is there for you to see the trends that were available over this year to have traded......

By using Price and a 50 period SMA in just over 5 years you could have made over 5500 hundred pips.
here is a link for the results to that system....... Indicator Performance Analysis - (50 Day Moving Average vs Price)

As to 15000 pips over the last 11 years.... that comes to about 1363 pips per year average, that does not assume every year made that.. Some years may have made more, some years may have been in drawdown. I have no problem with that, I am curious as to the exposure time involved to get those pips however.

I have a simple mechanical system that has generated 2062 pips last year and 1370 pips so far this year.
The system puts you in the market only two days a week.
I like those returns for the exposure much better.

You may also want to take a look at Donchians 5 - 20 MA system.



The Donchian 5-20 MA system

The rules for the five- and 20-day moving average method break down into two categories: general and supplemental.
General rules

1. The extent of penetration of the moving average is broken into units, depending on price level. For commodities selling over 400 (wheat, soybeans, silver), for example, a penetration of 40[cents] is required (Donchian had six price classes in the days before interest rates and stock index futures).

2. No closing penetration of the moving averages counts as a penetration at all unless it amounts to at least one full unit (39[cents] in Rule 1 was not enough for penetration - it had to be 40[cents] to count).
Basic Rule A: Act on all closes that cross the 20-day moving average by an amount exceeding by one full unit the maximum penetration in the same direction on any one day on a preceding occasion (no matter how long ago) when the close was on the same side of the moving average. For example, if the last time the closing price of cotton was above the moving average it stayed above for one or more days, and the maximum amount above on any one of the days was 64 points, then when the closing price of cotton moves above the moving average, after having been lower in the interim, a buy signal is given only if it closes above the average by more than 64 points (the unit in cotton is 0.10). This principle - the requirement that a penetration of the moving average exceeds one or more previous penetrations - is a feature of the five- and 20-day method that distinguishes it from other moving average methods.
Basic Rule B: Act on all closes that cross the 20-day moving average and close one full unit beyond (above or below, in the direction of the crossing) the previous 25 daily closes.
Basic Rule C: Within the first 20 days after the first day of a crossing that leads to an action signal, reverse on any close that crosses the 20-day moving average and closes one full unit beyond (above or below) the previous 15 daily closes.
Basic Rule D: Sensitive five-day moving average rules for closing out positions and for reinstating positions in the direction of the basic 20-day moving average trend are:

1. Close out positions when the commodity closes below the five-day moving average for long positions or above the five-day moving average for short positions by at least one full unit more than the greater of a) the previous penetration on the same side of the five-day moving average, or b) the maximum point of any previous penetration within the preceding 25 trading sessions. If the distance between the closing price and the 20-day moving average in the opposite direction to the Rule D close-out signal has been greater within the prior 15 days than the distance from the 20-day moving average in either direction within 60 previous sessions, do not act on Rule D close-out signals unless the penetration of the five-day average also exceeds by one unit the maximum distance both above and below the five-day average during the preceding 25 sessions.

2. After positions have been closed out by Rule D, reinstate positions in the direction of the basic trend a) when conditions in Rule D, point 1 above are fulfilled, b) if a new Rule A basic trend signal is given, or c) if new Rule B or Rule C signals in the direction of the basic trend are given by closing in new low or new high ground.

3. Penetrations of two units or less do not count as points to be exceeded by Rule D unless at least two consecutive closes were on the side of the penetration when the point to be exceeded was set up.
Supplementary General Rules

1. Action on all signals is deferred for one day except on Thursday and Friday, For example, if a basic buy signal is given for wheat at the close on Tuesday, action is taken at the opening on Thursday morning. The same one-day delay applies to Rule D close-out and reinstate signals.

2. For signals given at the close on Friday, action is taken at the opening on Monday.

3. For signals given at the close on Thursday (or the next to last trading day of the week), action is taken at the Friday (or weekend) close.

4. When there is a holiday in the middle of the week or a long weekend, signals given at the close of sessions prior to the holiday are treated as follows: a) for sell signals, use weekend rules; and b) for buy signals, defer action for one day, as is done on regular consecutive trading sessions.

A word of caution

The five- and 20-day moving average method, and most other trend-following methods, for that matter, are not good to follow unless you are prepared to include in your program a sufficient number of futures to provide broad diversification. Risks are increased to an inordinate degree if you try to follow the method in one or just a few selected contracts,
The commodities that are in a pronounced trend and are not giving, new signals are frequently the ones in which the best results are attained. Therefore, in starting a new program it might be advisable not to wait for new signals but to take positions in the direction of prevailing trends in those not giving new activation advice. Because the markets are moving so wildly, however, it might be best to a) go in the direction of the trend only after one or more days of counter-trend movement, plus a day move in the direction of the basic trend, and b) to use an arbitrary stop on positions taken without waiting for new signals.

Remember, five and 20 days are not necessarily the best lengths for moving averages. And, most probably, the action rules themselves, as outlined above, could be refined and improved. Also, it may be that exponential moving averages, weighted moving averages, moving averages based on highs or lows or daily means, or some combination of all these, would produce superior results.

In this field of technical study it is probably safe to state that the beginning of wisdom comes when you stop chasing rainbows and admit that no method is perfect. When you find yourself willing to settle for any comparatively simple method that in tests over a long period of time makes money on balance, then stick to the method devotedly, at least until you are sure you have discovered a better method.
Richard Donchian worked at Shearson Lehman Bros. while developing his technical analysis and trend-following methods that today many traders use as the base of their systems. He also launched the first managed futures fund in 1948. Donchian died in 1993 at the age of 87.

2005