Richard Donchian made the Donchian channel trading system which based on 50 weeks period. But this trading system was popular in the 1980s by Richard Dennis when he used it to support the Turtles trading system. The strategy of Donchian channel is to open short position if the market price breaks the lower line and open long position if the market price breaks the upper line of the channel. The lower line of the channel reflects the minimum value of the last 50 weeks and the upper line reflects the maximum value of the last 50 weeks. Donchian channel is used in many foreign exchange trading strategy to determine the entry trading levels. Even they have the same entry method using Donchian channel, they have different exit trading method.
And bellow are the some example of exit method using Donchian channel.
- Using the opposite channel line, and time period
- Using the median line in donchian channel, the median line is the average upper and lower line in donchian channel indicator
- Exit method using Average True Range indicator or ATR
And here are trading rules variants using Donchian channel indicator
- Open short trading if the market price breaks and close under the lower line you should set at least 20 candlestick period for Donchian channel indicator, and close trading position if the market price closes above the upper line
- Open long trading id the market price breaks and close above the upper line and you should set donchian channel indicator at least 20 candlesticks period
You can improve your trading strategy with try different period for Donchian channel setting. And I used 0.2 – 1 and here are the test trading results
1. Trading without optimization, I used EURUSD as a trading pair
I picked the USDJPY to give you a test trading example for which the system is not working. And here are the completed results for donchian channel indicator.
TF=Daily Profit Loss ($)
Donchian trading system result with optimization
Donchian channel is a simple trading strategy and works pretty good on some foreign exchange pairs. It indicates that the forex pairs don’t give the same trading result, each trading pair has its own character. Then I changed the trading rules for USDJPY and I surprised with the result, I used the trading strategy pairs for which it gives good result before and change the rules for other trading pairs.