Contrarian Donchian Channel Touch Entry Strategy with Post Stop Loss Pause and Trailing Stop Loss

The Contrarian Donchian Channel Touch Entry Strategy is a quantitative trading strategy based on the Donchian Channel indicator. It incorporates stop loss pause and trailing stop loss for risk management. The…

Pine ScriptBreakout Trend following Donchian

Author: ChaoZhang
Complexity: Starter · 77 lines
Parameters: 4
Backtest bar: 1d · swing
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

The strategy enters long/short positions when price touches the upper/lower band of Donchian Channel. Stop loss and take profit levels are set for each trade. After a stop loss hit, there would be a pause for a number of bars before taking a new trade in the same direction. During a trade, trailing stop loss is used to lock in profits.

Strategy Logic

The strategy uses 20-period Donchian Channel, consisting of Upper Band, Lower Band and Middle Line.

Entry Logic

Go long when price touches the lower band; go short when price touches the upper band.

A pause (e.g. 3 bars) is required after previous stop loss in the same direction to avoid chasing trends.

Stop Loss and Take Profit

For each trade, set a fixed percentage stop loss (e.g. 22%) and a dynamic take profit calculated based on risk-reward ratio (e.g. 2)

Trailing Stop Loss

Use a trailing stop loss during trades:

For long trades, if price crosses above middle line, adjust stop loss to the mid-point of entry price and middle line.

Vice versa for short positions crossing below middle line.

Advantages

Catch trending moves using Donchian Channel breakouts.
Contrarian touch entry aligns with trading against the trend idea.
Effective risk management with stop loss pause and trailing stop.
Clear and easy-to-implement rules.

Risks

Whipsaws on sideways markets for a trend-following system.
Fixed stop loss could be prone to getting stopped out prematurely.
Overly aggressive trailing stop adjustment could knock out profitable trades too early.
Parameter optimization is crucial.

Enhancement Opportunities

Optimize Donchian Channel lookback period for best parameters.
Incorporate position sizing rules e.g. reset pause count periodically.
Add filters using other indicators to avoid false breakouts.
Experiment with dynamic stop loss.

Summary

The Contrarian Donchian Channel Touch Entry Strategy integrates trend identification, risk management and more. With further parameter tuning and combinations with other models, it can achieve better robustness and profitability for experienced traders.

Parameters

Name	Default	What it controls
v_input_1	20	Donchian Channel Length
v_input_2	2	Risk/Reward Ratio
v_input_3	0.22	Stop Loss (%)
v_input_4	3	Pause After SL (Candles)

Source Pine Script

/*backtest
start: 2023-01-17 00:00:00
end: 2024-01-23 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
strategy("Contrarian Donchian Channel Strategy - Touch Entry with Post-SL Pause and Trailing Stop", overlay=true, default_qty_value=0.01, default_qty_type=strategy.percent_of_equity)

// Inputs
length = input(20, minval=1, title="Donchian Channel Length")
riskRewardRatio = input(2, title="Risk/Reward Ratio")
stopLossPercent = input(0.22, title="Stop Loss (%)") / 100
pauseCandles = input(3, minval=1, title="Pause After SL (Candles)")

// Donchian Channel Calculation
upper = highest(high, length)
lower = lowest(low, length)
centerline = (upper + lower) / 2  // Calculating the Centerline

// Plotting Donchian Channel and Centerline
plot(upper, color=color.red, title="Upper Band")
plot(lower, color=color.green, title="Lower Band")
plot(centerline, color=color.blue, title="Centerline")

// Tracking Stop Loss Hits and Pause
var longSLHitBar = 0
var shortSLHitBar = 0
var int lastTradeDirection = 0 // 1 for long, -1 for short, 0 for none

// Update SL Hit Bars
if (strategy.position_size[1] > 0 and strategy.position_size == 0)
    if (close[1] < strategy.position_avg_price[1])
        longSLHitBar := bar_index
        lastTradeDirection := 1

if (strategy.position_size[1] < 0 and strategy.position_size == 0)
    if (close[1] > strategy.position_avg_price[1])
        shortSLHitBar := bar_index
        lastTradeDirection := -1

// Entry Conditions - Trigger on touch
longCondition = (low <= lower) and (bar_index - longSLHitBar > pauseCandles or lastTradeDirection != 1)
shortCondition = (high >= upper) and (bar_index - shortSLHitBar > pauseCandles or lastTradeDirection != -1)

// Trade Execution
if (longCondition)
    strategy.entry("Long", strategy.long)
if (shortCondition)
    strategy.entry("Short", strategy.short)

// Initial Stop Loss and Take Profit Calculation
stopLoss = strategy.position_avg_price * (1 - stopLossPercent)
takeProfit = strategy.position_avg_price * (1 + stopLossPercent * riskRewardRatio)

// Trailing Stop Loss Logic
var float trailingStopLong = na
var float trailingStopShort = na

// Update Trailing Stop for Long Position
if (strategy.position_size > 0)
    if (close > centerline)
        trailingStopLong := (strategy.position_avg_price + centerline) / 2
    stopLoss := na(trailingStopLong) ? stopLoss : max(trailingStopLong, stopLoss)

// Update Trailing Stop for Short Position
if (strategy.position_size < 0)
    if (close < centerline)
        trailingStopShort := (strategy.position_avg_price + centerline) / 2
    stopLoss := na(trailingStopShort) ? stopLoss : min(trailingStopShort, stopLoss)

// Setting Stop Loss and Take Profit for each trade
strategy.exit("SL_TP_Long", "Long", stop=stopLoss, limit=takeProfit)
strategy.exit("SL_TP_Short", "Short", stop=stopLoss, limit=takeProfit)

Published by ChaoZhang on the FMZ strategy square · last modified 2024-01-24. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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