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Donchian Channel Breakout

Donchian Channel Breakout

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Published by Shahzad Dalal

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Published by: Shahzad Dalal on Apr 27, 2010
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12/30/2012

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DonchianChannel Breakout
Donchian Channel Breakout
A Donchian Channel is created by determining the highest and lowest point in the last X numberof days. The highest point during the last X number of days marks the top of the channel and thelowest point marks the bottom of the channel. A long entry signal is given when the price breaksout to the upside and a short entry signal is given when a price breaks to the downside.This strategy was made famous by the Turtle Traders who used the strategy to successfully tradecommodities in the 1980’s. The Turtles were a group of people that were taught to trade byRichard Dennis and William Eckhardt and then given accounts to trade. The Turtles mademillions of dollars during their trading careers and many went on to manage money for otherpeople. The Turtles’ entry strategy used either a 55 day or a 20 day Donchian Channel breakout.Using Market Analyser we can test the effectiveness of a similar strategy in the markets today. Iam using the Trading System in the Platinum version of Market Analyser to create the results thatyou see here today. Once you have successfully developed a strategy you can use the Analysertool in Market Analyser to provide you with signals on a daily basis.
MA Trading System
In the Trading System we are going to develop a strategy based on a Donchian Channelbreakout. The indicator to select in Market Analyser is the Price at Extreme and set the timeframeto the number of periods that you are interested in testing.The test shares we will assess are the Top 20 Australian companies from 1/1/2000 up to31/12/2008. This test period includes the bear market of 2002 as well as the credit crisis of 2008.Initially while developing the strategy the exit used will be to exit after 1 day of trading to takeeither a profit or a loss. Later we will apply a trailing type exit strategy. Initially I tested a 25 dayDonchian Channel Breakout.
 
DonchianChannel Breakout
As can be seen from the results the strategy is profitable, but nothing spectacular. It makes aprofit of $8,000, based on $100,000 capital and a trade size of $5,000 over eight years. It is nottime to give up your day job just yet.The Turtle Strategy which used a 55 day breakout is even worse losing $1,500, so not really agreat strategy for today’s market. A 10 day breakout makes $5,000, with the profit reaching ashigh as $40,000 before losing in 2008. A 5 day breakout makes $15,000 with a peak profit of$35,000.
 
DonchianChannel Breakout
The strategy makes money during a bullish market, but loses money when the market turnsbearish as it did in 2002 and 2008. But let’s find the market’s secrets that may be hidden fromview.
What a Difference a Day Makes
Maybe there are better days of the week to trade this strategy, so let’s take a look at how thisplays out. The results in the table below show what happens when you trade just one set day ofthe week following this strategy.Day of Week ProfitMonday -$2,253Tuesday -$4,034Wednesday $5,492Thursday $3,563Friday $13,551Wow what a difference a day makes! It would be best to stay in bed on Monday and Tuesday.So make sure you take the first two days of the week off when using this strategy and if you wantto work only one day a week make sure it is a Friday. Now adding the criteria to trade onWednesday, Thursday or Friday to the strategy produces the following results.

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