Donchian breakout strategy

If last week’s range trading opportunities aren’t for you, then I expect, when you look at a range, you’re waiting for the breakout.

Tight trading ranges, and low volatility are often the buildup to explosive market moves. And breakout trading is all about catching those moves, and running with them.

But, if you’ve tried catching breakouts, I expect you’re all too familiar with the fakeout – when it looks like price has moved above, but in fact retraces back into the range (exactly the kind of move we were using in our strategy for sideways market last week).

So, how do we deal with the fakeout?

There are lots of technical ways we can try to sniff out a fake move – watching momentum indicators, waiting for a pull back and getting in after that, waiting for candles to close …

But what I want to show you today is much simpler than that.

It doesn’t require any technical indicators.

Our rule is simply that:

Either the move is explosive, and we run with it.

Or we get out immediately.

Here’s how it works …

I’m using the simplest way to define a breakout: the Donchian channel. If you’re not familiar with the Donchian channel, it simply plots the highest high and lowest low of the past 20 candles (or whatever number of bars you enter into the settings). It’ll look something like this …

So, we’re going to enter a breakout position as soon as the price breaches the Donchian channel.

Of course, not every break of the Donchian channel will be followed by an explosive trend, so we’re going to cut our losses very fast with a tight trailing stop.

Here’s how the Donchian breakout strategy plays out …

Things to bear in mind:

If you’re trading a Donchian breakout strategy ….

• You’re going to have a LOT of little wins and losses. Be careful of your trading costs – if you’re trading an instrument with a wide spread, these costs will mount up.
• Again, if you’re trading very short timeframes, those spread costs will be a larger chunk of your market move, so it’ll eat into your earning potential.
• Be brutal – we’re not interested in meandering prices here and waiting around – just strong moves, or we’re out.
• By getting out fast, we’re ready for the next new high/low that’ll be along very soon with another profit opportunity.

What a Donchian breakout strategy shows so clearly is that entries are just modest part of our trading strategy – this is about as simple a trigger as you can get. What matters is how we manage the trade once it’s open – where we take profits, how we trail the stop.

Look forward to hearing your thoughts …

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