Donchian Channel Mean Reversion

Entry Logic

• Exact Entry Trigger: In a ranging market, enter short when price touches the upper Donchian Channel. Enter long when price touches the lower Donchian Channel.
• Confirmation: A reversal candle pattern at the channel boundary.
• Timeframe: 15-minute, 60-minute.
• Market Condition: Ranging.

Exit Logic

• Profit Targets: Target the middle line of the Donchian Channel.

Stop Loss Structure

• Hard Stop: Place stop 1 ATR beyond the channel boundary.

Risk Management Framework

• Risk Per Trade: 0.5% of account capital.
• R:R Requirement: Minimum 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.

Trade Filtering

• Market Conditions to Avoid: Strong trending markets.

Context Framework

• Range Location: Buy at the bottom of the range, sell at the top.

Trade Management Rules

• Take Profits: This is a mean reversion strategy; take profits at the target.

Time Rules

• Optimal Window: During periods of low volatility and clear range-bound action.

Setup Classification

• A+ Setup: The touch of the channel aligns with a higher timeframe support/resistance level.

Market Selection Criteria

• Instruments: Range-bound stocks and forex pairs.

Statistical Edge Metrics

• Win Rate: 65-75%.
• Profit Factor: 1.5.
• Expectancy: 0.25R.

Failure Conditions

• Strategy Fails: When the market breaks out of the range.

Psychological Rules

• Discipline: Do not hold for large profits; respect the mean-reverting nature of the trade.

Advanced Components

• Filters: Use a low ADX reading (< 20) to confirm a ranging market.

Location

• Strongest: In a well-established, sideways channel.