The Donchian Channel was developed by Richard Donchian, who used a 50 weeks period in the original strategy. The idea is to buy when the price breaks the upper band of the channel (maximum 50 weeks) and sell when it breaks the lower band of the channel (minimum 50 weeks). However, this is Richard Dennis who popularized the technique in the 80s because it was the basis of the technique taught to a group of turtles. This famous group born out of a bet between Richard Dennis and his friend Bill Eckhard.
There are several strategies based on Donchian channel. They have a common entry point (the case of a channel band) but they differ in the output:
- The case of the opposite band the channel, with the same period or shorter period.
- Return to the median strip: The average of the upper and the lower.
- Take-profit and Stop-Loss based on ATR
For today’s test, I chose the first option, the rules are as follows:
- Buy: Buy when the price breaks and closes above the upper band (the maximum of the last 20 candles). Close position when price closes below the strip affixed.
- Sale: Sell when the price breaks and closes below the lower band (the minimum of the last 20 candles). Close the position when the price closes above the band affixed.
- For optimization, I will try out a different period than the input. To ensure that the output period is less, I used a factor (0.2 to 1) which multiplies the input period.
The tests are performed for the period from 01-01-2008 to 01-01-2012. The initial capital is $ 10,000. The volume of trade is 1 mini lot (10K).
- - Results without optimization
I chose the USDJPY to show you an example of a currency pair for which the strategy is not working. The following table summarizes the results for other major currency pairs with the default settings (Period = 20).
|TF=Daily||P/L ($)||PF||RF||SR||Equity DD (%)|
TF : Time Frame; P/L : Profit/Loss; PF : Profit Factor; RF :Recovery Factor; SR : Sharp Ratio; DD : Drawdown
2- Results with optimization
This strategy based on the Donchian channel is very simple and gives good results on some currency pairs. This confirms the fact that the currency pairs do not behave the same way or each pair has its own personality. To try to take advantage of this phenomenon, I reversed the rules for USDJPY (buy when you need to sell and sell when you need to buy) is called fading. I almost fell off my chair seeing the graph with the default settings (Fig. 6). So the idea is to trade with the strategy pairs for which it works well and reverse rules for others. However, I advise you to use demo accounts every time you want to explore new ideas. Be careful because a currency pair can change personality! This is the art of trading!