Donchian Channel Mean Reversion

Entry Logic

• Long Entry: Price touches the lower 20-period Donchian Channel and reverses.
• Short Entry: Price touches the upper 20-period Donchian Channel and reverses.
• Confirmation: A strong reversal candle that closes well off the channel edge.
• Timeframe: 4-hour.
• Location: At the 20-period high or low.
• Market Condition: Ranging or slowly trending markets.

Exit Logic

• Profit Target: The midpoint of the Donchian Channel (the average of the upper and lower channels).
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if price closes outside the channel.
• Opposite Signal: Not applicable.
• Time Expiration: Exit after 5 bars.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: Just beyond the Donchian Channel line.
• Soft Stop: A close outside the channel.
• Max Dollar Loss: $1200.
• Max Percent Loss: 2.4%.
• Structural Stop: Beyond the recent swing high/low that created the channel line.

Risk Management Framework

• Risk Per Trade: 1.5%.
• Daily Limit: 1 trade.
• Weekly Limit: 5%.
• Max Drawdown: 15%.
• R:R Requirement: 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: The channel width is a direct measure of volatility.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Avoid strongly trending markets.
• Setups: Look for a clean touch and rejection of the channel line.
• Instruments: Major forex pairs, commodities.
• Time Restrictions: None.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: Neutral.
• VWAP Relationship: Not applicable on this timeframe.
• MA Relationship: Price is likely extended from the 20 and 50 MAs.
• Range Location: At the top or bottom of the recent range.
• Higher TF Alignment: The daily chart should also show signs of being range-bound.

Trade Management Rules

• Breakeven: After a 1R move.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: Works better for slower, more defined moves.

Time Rules

• Optimal Window: Any.
• Times to Avoid: Illiquid periods.
• Session Notes: A longer-term range trading strategy.

Setup Classification

• A+ Setup: A touch of the channel line with a classic reversal pattern (e.g., engulfing bar).
• A Setup: A touch of the channel line with a pin bar or doji.
• B Setup: Price pierces the channel line slightly before reversing.
• C Setup: Price breaks out of the channel and trends.

Market Selection Criteria

• Instruments: EUR/USD, AUD/USD, Gold, Silver.
• Volume: High.
• Volatility: Moderate.

Statistical Edge Metrics

• Win Rate: 65%.
• Avg Win: 1.5R.
• Avg Loss: 1R.
• Profit Factor: 1.95.
• Expectancy: +0.325R.

Failure Conditions

• Market Conditions: A breakout from a long-term consolidation.
• Specific Scenarios: When a new trend begins.

Psychological Rules

• Discipline: Requires patience to wait for price to reach the edge of the range.

Advanced Components

• Regime Detection: Use a wider Donchian Channel (e.g., 50-period) to define the overall trend.
• Filters: Avoid trading if the channel has been narrowing for a long time (a sign of a pending breakout).
• Correlation: Be aware of correlated assets.
• MTF Alignment: Check the daily chart for confirmation of the range.

Location

• Strongest: In well-established, horizontal ranges.
• Weakest: In trending markets or during periods of high volatility.