How To Trade Donchian Breakouts When Forex Trading

by

James Woolley

The Donchian breakout system (originally created by Richard Donchian) is a tried and tested system that has been used by traders for many years now. It was originally designed to be used on commodities, but it can also be just as effective when used to trade the major currency pairs as well.

Donchian breakouts basically refer to those occasions when the instrument traded breaks out of the current 4 week trading range to make a new high or low. If there is a new high, you open a long position and if there is a new low, you open a short position.

The aim of this system is to enter a position at the start of a new long-term trend and it will often achieve this aim because the really big trends always start with an initial breakout. So by trading this system you will never have to worry about missing the big long-term price moves because you will always be in the markets whenever a new breakout takes place. Of course not every breakout will be profitable but the big breakouts will usually more than make up for the false breakouts.

So is this system actually profitable when trading the major currency pairs?

Well most of the time it is, particularly if you trade many of the major trending currencies. If you want to take a more cautious approach, rather than closing or reversing a long position by opening a new position when a new 4 week low is made, for instance, you could instead use a 1 or 2 week time frame to close out early in the case of a false breakout taking place.

There are various ways you can trade this system but the basic Donchian breakout system itself is relatively sound. This is because these 4 week cycles are very significant and many traders pay close attention to them. Therefore because many traders will notice these breakouts and trade them themselves, any breakout that occurs will usually have a lot of momentum behind it.

False breakouts are the biggest problem you will face when trading this system but if you can contain your losses and let your winning trades run for as long as possible, then there are big profits to be made. The Donchian breakout system has been used for many years now and I think it will continue to be profitable for those traders who decide to use it. It;s not for everyone because it does require patience to hold onto long-term positions, but the most profitable forex systems are very often the ones that use the longest time frames.

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