A Modified Donchian Trend Channel System

The success of the turtle traders which became legendary created a tremendous interest in trend following methods. One of the original systems used was the Donchian Channel System. As described in the Way Of The Turtle by Curtis Faith, the system uses a 20 day breakout for entries and a 10 day breakout for exits with a 25dema and 350dema trend filter. Only longs are taken when the 25dema is above the 350dema and only shorts are taken when the 25dema is below the 350dema. It also uses a 2 ATR (average true range) stop.

This system obviously worked well for the turtle traders who primarily traded commodities, but anyone who has tried to use it on stocks has quickly realized that it just doesn't seem to work as profits are often given back entirely by the time the exit signal is generated. I tried to use it several years ago and abandoned it right away for the above reason. However, in looking at it again recently, it occurred to me that a few qualifiers might improve the performance and I believe that the following Modified Donchian System will produce profits for stocks. It does take some practice and experience to implement the changes, but it is not so difficult.

Modified Donchian Trend Channel System

Longs

Enter long on the next day's open after any 20 day closing high, i.e. if a stock or market closes above the highest closing price of the previous 20 days. Use a stop loss below the previous swing low.

A 10 day or 20 day closing low is not in itself an exit signal. An exit signal will be generated under the following conditions:

Price closes below the previous 2o day closing low, or
Price make a 10 day closing low, makes a lower 10 day closing high and then makes
another 10 day closing low. This is called a 10 day swing failure.
Price makes a double top without making a 20 day closing high above the previous
20 day closing high or closing only one day above the previous 20 day closing high
and then makes a 10 day closing low with tops at least 4 weeks apart.

We will consider the benefit of adding a trailing stop at a later date.

Shorts

Reverse the above for shorts, except shorts may only be taken if price closes below the 2oodema.

Given the above rules a short signal was generated on 1/4/08 with an entry of 48.41 in the Qs on 1/7/08. A double bottom was formed on 3/10/08 with a 10 day closing high exit signal on 3/18/08 with an exit of 43.51 on 3/19/08. A 20 day closing high occurred on 3/24/08 with a long entry of 44.68 on 3/25/08. The system remains long to date.

I apologize for not having a chart to illustrate the above system. I am working on it an will provide charts in the near future.

Have a good week trading.