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Donchian Breakout Trading System

The Donchian Breakout trading system (rules and explanations further below) is a classic trend following system. As such, we included it in our State of Trend Following report, which aims to establish a benchmark to track the generic performance of trend following as a trading strategy.

The Wisdom State of Trend Following reports the performance of a composite index made up of classic trend following systems (Donchian Breakout and others) simulated over multiple timeframes and a portfolio of futures, selected from the range of 300+ futures markets over 30+ exchanges that Wisdom Trading can provide clients access to. The portfolio is global, diversified and balanced over the main sectors.

We publish updates to the report every month, including that of the Donchian Breakout trading system.

 

Donchian Breakout System Explained

The Donchian Breakout Trading System is based on the Turtle system. It uses the Turtle logic, except it is single unit, does not use the Last Trade is Winner rule, does not use correlations, and uses a MACD Portfolio Manager to filter trades.

The Donchian System trades on breakouts similar to a Donchian Dual Channel system. There are two breakout figures, a longer breakout for entry, and a shorter breakout for exit.

The Donchian system uses a stop based on the Average True Range (ATR). Note that the Turtle concept of N has been replaced by the more common and equivalent term Average True Range (ATR).

Entry Breakout (days)

A trade is entered when the price hits the high or the low of the preceding X-days. For example,Entry Breakout = 20 means that a long position is taken if price hits the 20-day high; A short position is taken if the price hits the 20-day low.

Entry Offset (ATR)

If set to zero, this parameter has no effect. If Entry Offset in ATR is set to 1.0, a long position isn’t entered until price hits the normal breakout price, plus 1.0 ATR. Likewise, a short position won’t be entered until the price hits the normal breakout price, minus 1.0 ATR. Either a positive or negative value can be specified for this parameter. A positive value effectively delays entry until the specified point after the breakout threshold chosen; a negative value would enter before the breakout threshold chosen.

Stop (ATR)

This parameter defines the distance from the entry price to the initial stop, in terms of ATR. This system by default uses the order entry price, not the fill price, as a basis of the stop price. Since ATR is a measure of daily volatility and the Turtle System stops are based on ATR, this means that the Donchian System equalizes the position size across the various markets based on volatility.

According to the original Turtle Rules, long positions were stopped out if price fell 2 ATR from the entry price. Conversely, short positions were stopped out if the price rose 2 ATR from the entry price.

Unlike the Exit Breakout based stop, which moves up or down with the X-day high or low, the stop defined by Stop in ATR is a “hard” stop that is fixed above or below the entry price upon entry. Once set, it does not vary throughout the course of the trade.

Note that trades are liquidated when price hits either the Exit Breakout, Entry Breakout for the opposite direction, or the Stop in ATR, whichever is closest to the price at the time.

Exit Breakout (days)

Trades in progress are exited when the price hits the high or the low of the preceding X-days. This concept is the identical to Entry Breakout, but the logic is reversed: Long trades are exited when price hits the X-day low, and short trades are exited when the price hits the X-day low. The Exit Breakout moves up (or down) with price. It protects against adverse price excursions, and also serves as a trailing stop that acts to lock in a profit when the trend reverses.

Note that trades are liquidated when price hits either the Exit Breakout, Entry Breakout for the opposite direction, or the Stop in ATR, whichever is closest to the price at the time.

These options can be enabled or disabled with the Hold Initial Stops and Use Reversal Exit parameters. If the initial stop is held, then the initial stop price will be used to exit during the trade. If using the reversal exit, then the trade will be exited if the price hits the entry breakout for the opposite direction.

Exit Offset (ATR)

If set to zero, this parameter has no effect. If Exit Offset in ATR is set to 1.0, a long position isn’t exited until price hits the normal breakout price, minus 1.0 ATR. Likewise, a short position won’t be exited until the price hits the normal breakout price, plus 1.0 ATR. Either a positive or negative value can be specified for this parameter. A positive value effectively delays exit until the specified point after the breakout threshold chosen; a negative value would exit before the breakout threshold chosen.

ATR (days)

Defined the number of days for the ATR calculation. This is an exponential moving average of the True Range. 39 represents a 20 day Wilder ATR.

MACD Long Average (days)

This is the number of days for the long moving average portion of the MACD indicator.

MACD Short Average (days)

This is the number of days for the short moving average portion of the MACD indicator.

The MACD itself is the Short Moving Average minus the Long Moving Average. The system will allow Long trades when the MACD is greater than zero and allow Short trades when the MACD is less than zero.

Money Manager

This system uses the Fixed Fractional Money Manager

Your Custom Version of this System

We can provide you with a customized version of this system to suit your trading objectives. Portfolio selection/ diversification, timeframe, starting capital… We can adjust and test any parameter to your requirements.

Contact us to discuss and/or request a full custom simulation report.

Get Your Custom Simulation Report

Alternative Systems

In addition to the public trading systems, we offer to our clients several proprietary trading systems, with strategies ranging from long-term trend following to short-term mean-reversion. We also provide full execution services for a fully automated strategy trading solution.

Please click on the picture below to see our trading systems performance.

Trading Systems - Wisdom Trading

CFTC-required risk disclosure for hypothetical results

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.