Trend
Donchian channel breakout (the Turtles)
Richard Donchian’s rule, used in the 1980s to train Richard Dennis’s famous Turtles. It catches strong moves and puts up with many small losses between them.
Rules
- Entry: a close above the high of the previous 20 candles.
- Exit: a close below the low of the previous 10 candles.
- Stop: 2 ATR from the entry (ATR is the average candle range over 14 candles).
- In the original, the entry happens right at the breakout during the day; here it happens on the next candle, which is simpler and more honest for daily data.
Code for the lab
entry = input(20, 10, 100, 5) exit_n = input(10, 5, 50, 5) up = highest(high, entry)[1] down = lowest(low, exit_n)[1] plot up, down buy when close > up sell when close < down stop 2 atr
You can change the code right in the lab: the numbers in input(…) become sliders.
Results on eight markets
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
The numbers are calculated in your browser from fresh source candles.
Default parameters, daily candles, a fee and slippage of 0.05% each per trade, no return on cash out of the market, prices without dividends. The test starts once all of the rule’s indicators are calculated.
What research says
The Turtle rules were published by a participant in the experiment, Curtis Faith, in his book “Way of the Turtle” (2007): system 1 is a 20-day breakout with a 10-day exit, system 2 is 55 and 20, and the stop is 2N, where N is the average true range over 20 days.
Szakmary, Shen and Sharma (2010) tested channel and moving-average rules on 28 commodity futures over 48 years: the net return was positive on at least 22 markets out of 28. In our table, too, the rule is strongest where trends are long, on crypto, and weaker on calm stock indexes.
Original source: Szakmary, Shen, Sharma. Trend-following trading strategies in commodity futures. Journal of Banking & Finance, 2010
When the rule breaks
- A sideways market: most breakouts are false.
- A few big trends make the profit: in the Absolute lab experiments, the three best trades brought in more than half of all profit.
- Fewer than half of the trades are winners, and that is hard to bear psychologically.