Donchian Channel Volatility Breakout

Entry Logic

• Entry trigger: Price breaks above the upper Donchian Channel or below the lower Donchian Channel.
• Confirmation: The breakout is on high volume.
• Timeframe: 4-hour or daily chart.
• Location context: The breakout occurs from a multi-period high or low.
• Market condition: A new trend is beginning.

Exit Logic

• Profit target: 3R or a trailing stop.
• Scaling out: Scale out at 2R and 3R.
• Trailing stop: Trail the stop using the middle line of the Donchian Channel.
• Signal failure exit: Price closes back inside the Donchian Channel.
• Opposite signal exit: A breakout in the opposite direction.
• Time expiration: Hold as long as the trend continues.
• Momentum loss: The price starts to move sideways.

Stop Loss Structure

• Hard stop: A close back inside the Donchian Channel.
• Soft stop: If the momentum of the breakout fades.
• Max dollar loss: 1% of account capital.
• Max percent loss: 1% of account capital.
• Structural stop: Below the low of the breakout candle for a long, or above the high for a short.

Risk Management Framework

• Risk per trade: 0.5% of account capital.
• Daily limit: 2% of account capital.
• Weekly limit: 5% of account capital.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 3:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: The Donchian Channel already accounts for volatility.
• Conviction sizing: A+ setups get full size.
• Scaling in: Add to the position on pullbacks to the middle Donchian Channel line.
• Scaling out: Scale out at predefined profit targets.

Trade Filtering

• Market conditions to avoid: Choppy, range-bound markets.
• Specific setups required: A clear breakout from a multi-period high or low.
• Instruments: Stocks, ETFs, and futures.
• Time restrictions: Not applicable.
• Chop/news avoidance: Avoid trading around major news releases.

Context Framework

• Trend direction: This is a trend-following strategy.
• VWAP relationship: Not applicable on higher timeframes.
• MA relationship: The breakout should be in the direction of the long-term moving averages.
• Range location: The breakout occurs from a well-defined range.
• Higher TF alignment: The breakout is in the same direction as the trend on the weekly chart.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1.5R profit.
• Scale out: At 2R and 3R profit targets.
• Add size: On pullbacks to the middle Donchian Channel line.
• Fast vs slow moves: This strategy is designed to catch long-term trends.

Time Rules

• Optimal window: Not applicable.
• Times to avoid: Not applicable.
• Session notes: This is a swing trading strategy.

Setup Classification

• A+ setup: A breakout from a multi-month high or low.
• A setup: A breakout from a multi-week high or low.
• B setup: A breakout from a multi-day high or low.
• C setup: A choppy, range-bound market.

Market Selection Criteria

• Instruments: Stocks, ETFs, and futures with a tendency to trend.
• Volume: High volume on the breakout.
• Volatility: The strategy works well in trending markets.

Statistical Edge Metrics

• Win rate: 30-40%.
• Avg win: 5R.
• Avg loss: 1R.
• Profit factor: 1.7.
• Expectancy: 0.7R per trade.

Failure Conditions

• When strategy fails: When the breakout is a false signal.
• Specific scenarios to avoid: Taking trades in choppy markets.

Psychological Rules

• Mental discipline: Must be able to handle a low win rate and long periods of drawdown.
• Key mental discipline requirements: Patience to hold on to winning trades.

Advanced Components

• Regime detection: Use a filter to identify trending markets.
• Filters: Use a volume filter to confirm the breakout.
• Correlation: Not applicable.
• MTF alignment: The breakout should be in the direction of the trend on a higher timeframe.

Location

• Where strongest: In markets that are beginning a new, strong trend.
• Where weakest: In choppy, range-bound markets.