Donchian Channel Breakout Strategy

Richard Donchian 

Richard Donchian, the creator of the Donchian Channels indicator, became a popular trader for his views on mechanical systems. Richard Donchian believed that traders should not rely on emotions, guesswork, and discretion. He believed that following clear, mechanical rules increases your chances of winning and that such an approach leads to more consistent trading behavior. 

Similar to the famous Turtle Trading approach, the Donchian system relies on objective rules to specify potential breakouts and the direction of trend. 

However, we figured that a reverse approach works just as well for this Donchian Strategy and thus we'll also be discussing a Mean Reversion Donchian Channel Strategy, just like we do in our most recent Youtube Video.

Disclaimer: Templates are for educational purposes only!

👉 Get the Donchian Channel Automation Template → Donchian Channel Profectus Template

This template is designed to run on the Daily Timeframe

What are Donchian Channels?

A Donchian Channel is a technical indicator that simply shows the highest and lowest prices reached over a period of historical candles. A 20-period Donchian Channel shows the highest high and lowest low of the last 20 candles.

The upper channel marks the highest price reached during the last 20 candles.
The lower channel marks the lowest price reached during the last 20 candles.

The Donchian-style breakout refers to price breaking above the upper channel, or below the lower channel, confirming a breakout and continuation of the trend. 

You can watch our full Donchian Channel Youtube video here.

The Donchian Channel Strategy

The Donchian Channel Strategy is all about looking for breakouts and trend continuations. 

When price breaks above the upper Donchian Channel, the market may be starting or continuing an uptrend. A buy trade is considered.

When price breaks below the lower Donchian Channel, the market may be starting or continuing a downtrend. A sell trade is considered.

This is the most basic rule set, but it has proven valuable for many traders over many, many years. We have added an extra rule to take the overall trend into consideration and minimize the number of false breakouts that we might be entering into. The simple rule means that:

• For buy positions, the previous candle needs to close above the highest price of the last 20 candles, and above the 100-period EMA
• For sell positions, the previous candle needs to close below the lowest price of the last 20 candles, and below the 100-period EMA.

Super easy. We’ve simply added another popular indicator and were able to increase our win rate for this strategy. 
Later in this article, you will also find a reversal variation that can be specifically as a Mean Reversion trading strategy.

This is what a buy trade example looks like on the chart.

The Donchian Channel strategy rules

Don’t worry, this is one of the easiest strategies you can build. Let’s focus on the buy-side only of this strategy for the following sections.

1. Price is above the 100-period EMA. The strategy is designed to run on the Daily timeframe, so we first check, at market open, if the previous Daily candle closed above the 100-period Daily EMA.
2. Price closes above the 20-period Donchian Channel. Secondly, we check if the price of the previous Daily candle closed above the highest high of the 20 candles before it. 
3. If no open trades, take a buy trade. 
4. Trailing stop-loss. If the trade reaches 1R profit, we start trailing the stoploss by trailing it along the low of candle ID 5 on the 4-hour timeframe.

Now, let’s build this system in Profectus AI.

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How to build the Donchian Channel strategy in Profectus AI

I already said that this is a very easy strategy to build. Let’s do it together; it will only take a few minutes. 

1. Check if price is above the 100 EMA. We start with a Run at time block and set the time to just after market open at 01:00 AM. We connect a trade rule block to it that checks if:
   
   Candle close Candle ID 1 > Moving Average Exponential period 100
2. Check if price is above the 20-day high. We add another trade rule block and specify that:
   
   Candle close Candle ID 1 > Market Property, Highest price candle period 2 - 21 Price value
3. No open trades. Use a count trades block to specify that there are no open trades yet 
4. Buy now. Use the buy now block to open the trade. This strategy has a percentage of price stop-loss and a percentage of stop-loss take-profit
5. Candle high/low trailing management. Navigate to Templates > Management Templates and select the Candle High/Low stop-loss management template. Apply it to the chart.

The Donchian Mean Reversion Strategy

We found that the original Donchian Channel Strategy was designed to detect and ride trend breakouts and continuations. Obviously, this works very well on markets that have a trending nature, such as equity markets. However, since we also focus a lot on the Forex market, this strategy will not perform well on all Forex pairs. So, we decided to switch the logic around to make the strategy also perform well in ranging markets. In this variation, the Donchian Channel Strategy is now also suitable as a Mean Reversion strategy.

All we had to do was change the Buy now and Sell now blocks around from the original template to change it into a Mean Reversion strategy. It's really that simple!
You can test for yourself how well this works on pairs that are mean reverting in nature, such as AUDCAD or NZDCAD.

Get Access to the Donchian Channel Automation Template

Want to see how this Donchian Channel strategy works when fully automated?

Access an enhanced automation template used to turn this trading concept into a deployable MQ5 trading bot inside Profectus. This template has a trade execution module included, so you can start testing it right away!

Disclaimer: Templates are for educational purposes only!

👉 Get the Donchian Channel Automation Template → Donchian Channel Profectus Template

This template is designed to run on the Daily Timeframe

How to run the Strategy in Metatrader 5?

We have written a full article to get you started in Metatrader 5 and how you can run any automated strategy, such as the Donchian Channel strategy, as an Expert Advisor yourself.

Read the full guide here to run your first trading bot in MT5

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