From the Donchian Channel breakout system, this system adds an additional moving average filter to help reduce whipsaws by only taking position that are confirmed by the moving averages. The entry trigger occurs through a price channel breakout when price exceeds a high or low of your choice of days or periods depending on your timeframe. Positions are closed if they are stopped out at a multiple of the ATR or when the price reverses and exceeds the price channel opposite to the entry position. As the price continues in favor of the position, additional positions are taken at steps of the ATR with the stop moving to match the newest position.
Entry occurs when the price breaks out of a prior high or low of the price channels and the moving averages confirm the direction of the trend. An example is if the price breaks above the 55 day high, the faster 25 day moving average would need to be above the slower 350 day moving average before a long position is taken. For a short example if the price breaks below the 55 day low, the faster 25 day moving average would need to be below the slower 350 day moving average before a short position is taken. The additional filtering checks to verify the trend is moving in the same direction as the price breakout to try and avoid whipsaws if a price channel is broken on a retracement before reversing again. Additional entries occur through pyramiding as the price moves in additional ATR increments in the last position's favor.
The Position Sizing method used in this system is called Percent Volatility that allows all markets to be traded equally by risk and volatility. Based on the 20 day ATR * 2 stop, only 2% account equity is at risk per position or in other words, if the stop is hit, you wouldn't lose more than the 2% risked. From the stop example below, if a long entry at $10 has a stop at $8, $2 would be at risk for every share if it were a stock purchase. If the account size is $10,000 and the risk per position is 2%, your risk would be $200. The $200 ($10,000 * 2%) divided by $2 (of ATR value if the stop is hit) would be a position of 100 shares. The position size is calculated in this manner of your risk divided by the value of the movement to the stop.
From the entry price, stops were set at 2 times the 20 period ATR. Using an example of a long entry price of $10 with a 20 day ATR of $1, the stop would be set at $8. Changing the example to a short position, the stop would be set at $12.
Exit occurs when the price touches or passes the opposite price channel. A long position exits when the price exceeds a prior low and a short position exits when the price exceeds a prior high. Examples include a long position entered at a 55 day high would exit at a 20 day low. Or a short position entered at a 20 day low would exit at a 10 day high.
While avoiding curve fitting, find a good balance of entry period, exit period, and stop values to keep the system tight enough to profit while allowing the market enough room for its daily noise. Try changing the trend filter from the moving average to a trend confirmation of the ADX.
The rules for this system and testing of this system can be found in Way of the Turtle by Curtis Faith. Pay attention to the additional parts of the Turtle rules also in this book that can be used to learn more about this system including reducing correlation risk through position limits.
Automate and test this Donchian Filter Breakout system using MetaTrader 4 code found at www.TFmt4.com. Test and find the best variables for profitability. Make changes to the system to find the best settings for your Forex trading style and risk tolerance.
Automate and test this Donchian Filter Breakout system using MetaTrader 5 code found at www.TFmt5.com. Test and find the best variables for profitability. Make changes to the system to find the best settings for your Forex trading style and risk tolerance.
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