My Donchian Daily Breakout System

My Donchian Daily Breakout System

August 17, 2018 0 By Jeremy


Donchian Daily Breakout System

One of the systems I am testing in my Robotic Investing portfolio is a Donchian Daily Breakout system based on Donchian Channels.  Like my ETF Swing Trading system, I don’t track this as part of the regular systems on this site (here are the ones I do track).

The appeal of this system is that it is shorter-term in nature and captures breakouts.  In comparison to my other trading systems which look for pullbacks, the Donchian Daily Breakout system looks for breakouts to the top Donchain Channel and buys into that strength looking for further momentum.

From time to time I will detail the trades that the system makes – win or lose – so you can see the results. If you want to find out when those trades happen, then please Subscribe to my newsletter and I will let you know when a new post goes up.

What are Donchian Channels

The Donchian Channels used in the Donchian Daily Breakout strategy take the high and the low for the past 20 days (although the trader can choose any value) and plots them as a channel on a chart.  What is displayed is a line showing those highs as well as one with the lows.  The result is a channel of prices that the trader can use to make decisions.

Here is an example of a channel from a trade I recently took:

Donchian Daily Breakout - TDOC

The two blue lines represent the 40 day Donchian Channels.   As you can see they create an area of resistance and support.  I use them to see when a stock is having a nice breakout move higher and try to capture some gains as it goes higher in the following days (that is the system anyway!).

If you look further back to July, you can see when the system would have been triggered again, and the nice result that trade would have had.

As always, I use TC2000 to calculate and display the Donchian Channels on the charts I use for this system.

My Donchian Daily Breakout Strategy

My inspiration for this strategy was, as it tends to be, is from a well researched book by Llewelyn James called The Honest Guide to Stock Trading:

I like the strategy for its simplicity.  As I always do, I have made some changes to one of the systems presented in the book so that it matches more with my personal market and trading beliefs.  One of those is to not use fundamental data as James suggests.  I don’t agree with him there as I see this as more of a shorter term system.  If you read the book, which I suggest you do, then you will notice other changes I have made.

Here is the objective of the Donchian Daily Breakout system:

To identify breakout opportunities in the S&P 500 in order to capture short-term profit opportunities.

This system will line up nicely with my trading/investing mission and objectives.

The Donchian Daily Breakout Rules

As with all systems trading, money is made with the exit and managing of the position as opposed to the entry. (Note:read Van Tharp’s discussion of random entries making money in Super Trader).

Here are the rules of the system, which I have programmed into TC2000 as a scan which looks at a universe of all U.S. stocks and does all the screening for me:

  1. SPY must be in a positive uptrend: SPY is above both the 65 and 195 simple moving average AND 65 day simple moving average is above 195 day simple moving average.
  2. Filter stocks where 40 day simple moving average is above the 120 simple moving average.
  3. Filter stocks where 40 day simple moving average is up 3% over past 15 days.
  4. Filter stocks where 120 day simple moving average is up 5% over past 90 days.
  5. Filter stocks where 90 day daily volume is greater than 250,000 shares.
  6. Filter stocks where volume is above the 20 day moving average for volume with an offset of 2.
  7. Filter stocks where the price is greater than $5.
  8. Filter stocks where the price is crossing up over the top channel in a 40 day Donchian channel.
  9. Set position size as 1.0% of account with a 7% max loss.
  10. Buy any stocks at the open when all criteria above is met.
  11. If stock progresses, set trailing stop under appropriate support level.

Here is a screenshot of the scan from TC2000:

Donchian Daily Breakout - TC2000 Scan

As with most of the systems I trade, this one also has a circuit breaker based on the S&P 500.  It will not trade if the market is in a downtrend based on the 65 and 195 day simple moving averages.

An Example Trade

Today (August 13, 2018), I actually entered a trade based on a generated signal that happened from Friday.  This system will trade every day if there are candidates to buy.  Some days there are not, so this part of my portfolio sits in cash or is allocated to another trade from on of my other short-term systems.  Here is what TDOC looked like:

Donchian Daily Breakout - TDOC

Keep in mind that TDOC passed all the criteria in the system, including the Donchian breakout.  As you can see, that big green price bar (2nd last bar) was when the system signaled, which was definitely confirmed by the huge volume bar.

Not sure if this trade will work – we never really do – however as the system has backtested well and is based on some solid trading principles it has a good chance.  If this one doesn’t work, there will be one that does.  I keep a stop on all these trades to limit losses if the trade goes the wrong way.

Next Steps

I am going to be watching the system closely and tracking all trades to make sure that the profits/loss ratio is at least 3:1, preferably higher. I will continue to let you know how that progresses (please subscribe!).

As with all systems, I just need to let it do its work and not let my own emotions get in the way.  As this system is build based on my own beliefs, I know I can do that.

Disclaimer: The information provided on this site is for education purposes only. The author is not a registered financial adviser and the ideas discussed on the site are just trading analysis and not recommendations. Robotic Investing doesn’t endorse any of the comments that might appear on the discussion threads. There is no guarantee for those comments to be accurate. By reading this site you automatically agree that Robotic Investing is not responsible for any of your trading decisions. Remember not to risk money that you cannot afford to lose. and all its products are Copyright© by Robotic Investing and property of Robotic Investing. All Rights Reserved.

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