Donchian Channel Breakout Strategy 426772

The Donchian channel breakout strategy is a trend following strategy based on the Donchian channel. It uses the highest high and lowest low over specified periods to determine entry and stop loss points for long and…

Pine ScriptBreakout Trend following Donchian

Author: ChaoZhang
Complexity: Intermediate · 78 lines
Parameters: 16
Backtest bar: 2h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Strategy Logic

The entry rules are: go long when the price breaks above the highest high over a lookback period (e.g. 20 days), and go short when the price breaks below the lowest low over another lookback period (e.g. 10 days).

The EXIT rules are: Long positions are stopped out at the middle or lower band of the channel; short positions are stopped out at the middle or upper band. The middle band is the average of the highest high and lowest low over a specified period (e.g. 10 days).

For example, trading BTCUSDT with the following parameters:

Long entry lookback period: 20 days
Long stop loss lookback period: 10 days
Stop loss at middle band: Yes
Short entry lookback period: 10 days
Short stop loss lookback period: 20 days
Stop loss at middle band: Yes

The entry and stop rules would be:

Go long when price breaks above the 20-day high
Long stop loss at midpoint of 10-day high and low
Go short when price breaks below 10-day low
Short stop loss at midpoint of 20-day high and low

By dynamically adjusting the lookback periods, the strategy can be optimized across market cycles to capture trends with better reward/risk.

Advantages

Breakouts can identify trend direction early on
Stop losses close to price help manage risk
Flexible parameters allow optimization for different cycles

Risks

Breakouts prone to whipsaws, need to confirm validity
Close stop losses susceptible to shakeouts in choppy markets
Poor parameter tuning could lead to over-trading or insufficient stops

Summary

The Donchian channel breakout uses breakouts to identify trends, with channel midpoints/bands as stops to control risk. Optimizing lookback periods can improve trend capture in strong moves. However, caution is needed on breakout validity and shakeouts. Overall this strategy suits mid- to long-term trend trading, but may struggle in choppy markets.

Parameters

Name	Default	What it controls
v_input_1	10	Channel Period for Long enter position
v_input_2	10	Channel Period for Long exit position
v_input_3	true	Is exit on Base Line? If 'no' - exit on bottom line
v_input_4	2.5	Take Profit (%) for Long position
v_input_5	true	Allow Long?
v_input_6	20	Channel Period for Short enter position
v_input_7	20	Channel Period for Short exit position
v_input_8	true	Is exit on Base Line? If 'no' - exit on upper line
v_input_9	2.5	Take Profit (%) for Short position
v_input_10	true	Allow Short?
v_input_11	2005	Test Start Year
v_input_12	true	Test Start Month
v_input_13	true	Test Start Day
v_input_14	2050	Test End Year
v_input_15	12	Test End Month
v_input_16	30	Test End Day

Source Pine Script

/*backtest
start: 2023-08-14 00:00:00
end: 2023-09-13 00:00:00
period: 2h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
strategy("Donchian Channel Strategy", overlay=true, default_qty_type= strategy.percent_of_equity, initial_capital = 1000, default_qty_value = 20, commission_type=strategy.commission.percent, commission_value=0.036)

//Long optopns
buyPeriodEnter = input(10, "Channel Period for Long enter position")
buyPeriodExit = input(10, "Channel Period for Long exit position")
isMiddleBuy = input(true, "Is exit on Base Line? If 'no' - exit on bottom line")
takeProfitBuy = input(2.5, "Take Profit (%) for Long position")
isBuy = input(true, "Allow Long?")

//Short Options
sellPeriodEnter = input(20, "Channel Period for Short enter position")
sellPeriodExit = input(20, "Channel Period for Short exit position")
isMiddleSell = input(true, "Is exit on Base Line? If 'no' - exit on upper line")
takeProfitSell = input(2.5, "Take Profit (%) for Short position")
isSell = input(true, "Allow Short?")

// Test Start
startYear = input(2005, "Test Start Year")
startMonth = input(1, "Test Start Month")
startDay = input(1, "Test Start Day")
startTest = timestamp(startYear,startMonth,startDay,0,0)

//Test End
endYear = input(2050, "Test End Year")
endMonth = input(12, "Test End Month")
endDay = input(30, "Test End Day")
endTest = timestamp(endYear,endMonth,endDay,23,59)

timeRange = time > startTest and time < endTest ? true : false

// Long&Short Levels
BuyEnter = highest(buyPeriodEnter)
BuyExit = isMiddleBuy ? ((highest(buyPeriodExit) + lowest(buyPeriodExit)) / 2): lowest(buyPeriodExit)

SellEnter = lowest(sellPeriodEnter)
SellExit = isMiddleSell ? ((highest(sellPeriodExit) + lowest(sellPeriodExit)) / 2): highest(sellPeriodExit)

// Plot Data
plot(BuyEnter, style=plot.style_line, linewidth=2, color=color.blue, title="Buy Enter")
plot(BuyExit, style=plot.style_line, linewidth=1, color=color.blue, title="Buy Exit", transp=50)
plot(SellEnter, style=plot.style_line, linewidth=2, color=color.red, title="Sell Enter")
plot(SellExit, style=plot.style_line, linewidth=1, color=color.red, title="Sell Exit", transp=50)

// Calc Take Profits
TakeProfitBuy = 0.0
TakeProfitSell = 0.0
if strategy.position_size > 0
    TakeProfitBuy := strategy.position_avg_price*(1 + takeProfitBuy/100)
    
if strategy.position_size < 0
    TakeProfitSell := strategy.position_avg_price*(1 - takeProfitSell/100)

// Long Position    
if isBuy and timeRange
    strategy.entry("Long", strategy.long, stop = BuyEnter, when = strategy.position_size == 0) 
    
strategy.exit("Long Exit", "Long", stop=BuyExit, limit = TakeProfitBuy, when = strategy.position_size > 0)

// Short Position
if isSell and timeRange
    strategy.entry("Short", strategy.short, stop = SellEnter, when = strategy.position_size == 0) 
    
strategy.exit("Short Exit", "Short", stop=SellExit, limit = TakeProfitSell, when = strategy.position_size < 0)

// Close & Cancel when over End of the Test
if time > endTest
    strategy.close_all()
    strategy.cancel_all()

Published by ChaoZhang on the FMZ strategy square · last modified 2023-09-14. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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