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Quick Take: Donchian Time Exposure System

September 8, 2009

Note: Quick Takes will be short articles introducing new ideas or concepts that haven’t been tested. It is designed to help inspire your own personal systems. If you wish to demonstrate the results of Quick Takes ideas, your results will be published on this site subject to verification.

As a new take on Donchian Channels, this system takes into account the impact of time as a moderator in adding/subtracting exposure. Donchian Channels are effectively a breakout system, and one of the key metrics of a successful breakout is that it makes progress quickly and tends to last a long time. In contrast, false breakouts tend to stall and eventually reverse soon after the initial move. Using this knowledge we can effectively increase and reduce exposure as a a function of time. The theory that I propose is that the metric of time to use for decisions should be equivalent to the square root of the channel length (note this could also represent a moving average length). Here are the rules:

1) Buy all 25 day breakouts for longs starting with a base exposure of 50% of capital–the key time decision metric is the square root of 25 or 5 days. Set a stop loss of 2 ATR below the entry price.

2) If the breakout rises above your entry price after 5 days add 25% additional exposure. In contrast, if the market fails to rise above your entry price after 5 days, subtract 25%. After subtracting 25% if the next 5 days go by without positive progress you should exit the trade even if the stop loss is not hit.

3) After adding your first successful 25% unit,  raise your stop loss to the first entry price for this unit only. If the stop loss is triggered you will still have 50% exposure. Exit this remaining unit only if your original stop loss is hit (2 atrs below the initial entry price).

4) After another 5 days, if the price of the market has risen above the first add on unit, than add another 25%. At this point the stop loss for all units is raised to the initial entry price of the trade.

5) Enter new 25% add ons for every new 25 day Donchian Channel breakout  following consolidations or pullbacks while still in the trade.  The trade exit at this point becomes the higher of the initial entry price of the trade or a 25 day low. Continue adding 25% up to a maximum of 200% exposure on every new 25 day breakout following consolidations or pullbacks.

Reverse these rules for short positions.

3 Comments leave one →
  1. mike permalink
    September 9, 2009 7:10 am

    I like using the channel length idea. Have you ever tried channel “depth” as measured by ATRs? A breakout from a deep channel might have a different result than a breakout from a shallow channel.. Just a thought. Keep up the good work.

    • david varadi permalink*
      September 9, 2009 10:06 am

      hi mike, yes i have tried a variety of methods, that is certainly a promising area. nice suggestion.

      dv

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