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Richard Donchian was a commodities and futures trader who began his career on Wall Street in the 1930’s. It’s fair to say that Donchian was somewhat of a genius and trading pioneer.

He was responsible for the first publicly managed futures fund, named Futures Inc, in 1949, and was also the first to develop a systematic approach to futures money management.

A guest post by  ForexTime

Donchian is sometimes known as the ‘father’ of trend trading as he was one of the first traders to implement systematic trend trading models based on his studies of the market.

Breakouts and trend following

Donchian’s trading models were based on objective trading rules, which later became known as trend following. The idea was simply to find patterns in the markets which could then be exploited for profit in an automated way.

The most famous of Donchian’s strategies are his channel breakout strategies.

Donchian found that buying a market when it broke out of a channel was often a good way to enter into a strong, upward trend. Conversely, when the the market broke lower than the channel, it was usually a time to go short or to close the position.

In this way, Donchian would look for certain timeframes where the chances for catching profitable trends worked the best.

Donchian realised that some timeframes worked better than others so a number of his strategies were based on a 55 day breakout.

Using Donchian in forex

Using a Donchian strategy in forex is therefore relatively simple. The first thing to do is to wait for a market to close above or below its 55 day highest or lowest closing price.

If the currency closes above its 55 day highest close then a buy order should be entered straight into the market. Likewise, if the currency closes below its 55 day lowest close, a short position should be entered straight into the market.

Exiting the position

In order to capture gains more readily, Donchian would use a shorter timeframe when closing his positions. For example, if Donchian had bought a market at a 55 day high, he would then close his position on a 35 day low. Likewise, if he had sold the market at a 55 day low, he would then close his position after a 35 day high.

Does it still work?

Since the Donchian strategy is an old one, it’s debatable whether the exact combination of parameters still work as effectively. In many cases, the method has been shown to have lost it’s edge, particularly in popular markets. Nevertheless, Donchian’s strategies can likely be reworked and tweaked to provide good results today.

Further reading:  5 most predictable currency pairs