- Forex Trading System: Free Simple Profitable
- 4 Replies to “Richard Donchian’s : The 4 Week Rule”
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The Turtles used a modified version of that download a pdf that gets into the detail here :. Go long on 4 and 11 week highs, cover those longs on 10 and 20 day lows respectively. Go short on 4 and 11 week lows, cover those shorts on 10 and 20 day highs respectively.
You can backtest these systems and trade them in fx and find that they are profitable long term even today, decades after their development. Enter on breaks of a 4 week range away from a day moving average, exit on breaks of a 4 week range toward a day moving average. Of course, we would need to get into stop losses, position sizes, market selection and so on. And all that does have an effect on outcome.
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Also, most of the trend following firms have gone to longer term in the last decade or so example: instead of trading a 4 week rule they would trade a 10 week rule , but I would not consider that a big enough change to say that these systems have stopped working. In fact, many speculated that these systems had lost profitability back in Futuresmag published this article. So trend following systems have worked for a long time and continue to do so with little to no modification.
Nonetheless I still got a lot of info from your answer. I really appreciate it, thanks a lot. Plus this strategy seems so effective.
Forex Trading System: Free Simple Profitable
Guess I just have to believe in it. Just a question. Is there a way for this strategy to be applied on shorter time frames. Like hourly or even 15 minutes.
I prefer shorter time frames. Maybe because of my personality.
4 Replies to “Richard Donchian’s : The 4 Week Rule”
Since you are a Master Contributor and Member I would like to take advantage and ask you some specific answer about my question. When a trading system which is composed of indicators becomes obsolete, does it mean that the indicators start to malfunction or stop working. Is that what it means when a trading system becomes obsolete, indicators stop functioning. I like the idea of having a set of rules to follow when entering and exiting a trade because somehow trading becomes simple but definitely not easy and you have the tendency to control emotions and not to let it get in the way.
But many traders still fail to do this even me. You can use a trend following system on any time frame. Ultimately, as you go shorter and shorter the expenses overcome the profitability and you are toast. The easiest way is the more forgiving and inexpensive way. Long term. Very boring for a new trader wanting action. The 4WR can work equally well on the short side. In Figure 2, we see a winning trade in Goldman Sachs.
Figure 2: Daily chart of GS showing four-week rule signals. One way to address the problem of staying in a trade too long is to change the exit rules. Instead of following the original 4WR to exit a position, traders can exit when a moving average is broken. A day moving average was selected because it is one-half of the entry signal four weeks is 20 trading days , but any time period shorter than the entry signal can be used.
Another use of the 4WR is as a trend filter on the overall market. For many traders, it can be a challenge to determine whether the market is bullish or bearish on a short-term basis. Applying the 4WR allows traders to objectively define the trend. If the market's most recent signal under this system is a buy, the trader can be confident that the market is in an uptrend.
Downtrends can be defined as times when the latest 4WR signal was a sell; in other words, the market has made a new four-week low more recently than it made a new four-week high. Using the 4WR as a filter, the trader would look for the 4WR to be on a buy signal before entering new long positions. Short positions would only be entered when the market is on a 4WR sell signal.
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This versatile system can also be applied to identify the longer-term trend. This can be done by applying Dow theory , a widely followed barometer of the health of the market.
When both averages make new highs, we are in a confirmed bull market. New lows in both averages signal a confirmed bear market. Divergences between the averages lead most analysts to express caution about the trend. One problem with applying Dow theory is that the rules are subjective, depending on how an analyst defines a new high or new low. It is possible for two skilled practitioners to look at the same charts and disagree on the signals.
Applying the 4WR prevents this possibility. Rather than subjectively determining a new high or low, the 4WR defines, in advance, when a signal is generated and all analysts using the 4WR will arrive at the same conclusion. The 4WR makes a great addition to any trader's toolbox. All traders should consider adapting the 4WR to their trading styles.
Keep in mind that there is nothing magic about four weeks. Traders may choose to use signals based on shorter or longer timeframes. Entry and exit signals can be asymmetric, for example entering on 4WR signals but exiting on two-week new lows. As noted, moving averages can also be used to generate exit signals.
It works by looking for discrepancies between the price and the RSI indicator.
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Normally, both the price and the RSI move in roughly the same direction. However, there are times when the price is falling but the RSI is rising, and vice versa. The best time frames to look for divergences are usually within a four-hour or daily window. These time frames tend to show stronger shifts in the mid-to-long-term trend. The yellow lines show the discrepancies between the RSI indicator and the price.
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The best times to look for divergences are when the price is in either the oversold or overbought areas. You can also use this strategy to find smaller changes in a trend — for instance, spotting a pullback in a downward trend. If we look at the circled area white more closely on the minute chart, we can see there was another divergence that showed momentum was changing back to bullish. Nothing mentioned in this article constitutes any type of solicitation, recommendation, offer or endorsement to buy and sell any crypto asset.
Trading in any financial market involves risk and can result in loss of funds. Before investing any money, one should always conduct thorough research and seek professional advice. For the purposes of this explainer, you will need the following:. An online charting tool account: Some of the most popular free online charting tool providers include TradingView , StockCharts and Yahoo Finance.
A basic understanding of candlestick charts: You can find our full explainer article on this here. Subscribe to , Subscribe.