Real-World Success Story

Richard Dennis, a famous commodity trader, used this Donchian channel strategy extensively, turning an initial $450 investment into approximately $150 million by focusing on channel breakouts.

Managing Risk: Stop Loss and Reverse Trades

• When a buy order is triggered, place a stop loss at the 20-day low.
• When a sell order is triggered, place a stop loss at the 20-day high.
• Add a reverse order at the stop loss level to enter the opposite trade automatically.

This ensures disciplined exits and quick reaction to market reversals.

Improving Signal Quality with Filters

False breakouts can be frequent. To reduce them:

• Use the RSI (Relative Strength Index) to filter out low momentum breakouts.
• Incorporate the 100-period moving average:
  • When price is above it, look only for long breakouts.
  • When price is below it, look only for short breakouts.

This filter reduces the number of false signals and enhances trade accuracy.

Position Sizing: The “Scaling In” Technique

Position sizing improves trade management:

• Enter with a fraction of your full position size initially.
• Add to the position as the trade moves in your favor.
• Move stop losses to protect profits.

Benefits:

• Limits exposure during false breakouts.
• Maximizes gains on strong trends.

Variations and Practice

• Some traders use a 55-22 breakout system (enter on 55-day high, exit on 20-day low).
• Test the Donchian channel strategy on a demo account to understand its dynamics before going live.

Donchian Channel Summary

The Donchian channel 20-20 breakout system is a proven tool for trend following and breakout trading. Combining it with momentum indicators and proper position sizing enhances success. Customize the approach to your trading style and objectives for optimal results.

Try this strategy on your PROP365 today to master how experts read charts and capture market moves effectively.