Waiting for a “Real” Donchian Channel Breakout


Aside from the weak Japanese Yen, trends in major currencies this year have been fairly short lived.  Short and choppy trends are one of the reasons to supplement an outright trend following trading system with options, but that’s not really what this post is about.  Last week I had two Donchian breakout trades get stopped out, one in the Euro and the other in the Swiss Franc.  The two trades netted to basically zero and now the real question is what will happen with the carry trade position I have open, New Zealand Dollar/Japanese Yen cross.  Images and commentary are below.

About the images:

The images below show a Donchian breakout strategy applied in ThinkOrSwim.  Dashed red lines indicate losing trades and blue dashed lines (harder to see and not just because of the markets) indicate winning trades.

Swiss Franc Trade (USD/CHF):

The Swiss Franc trade initially went in my favor, retraced, went in my favor, and then ended with a small loss.  One of the psychologically challenging aspects of trading a Donchian breakout system is that you need to be able to sit through trades that initially go in your favor and then reverse.

It's been a choppy year so far in the Swiss Franc.
It’s been a choppy year so far in the Swiss Franc.

Euro Trade (EUR/USD):

The Euro trade initially broke out and chopped around before pushing higher.  Unfortunately, the trade failed and the position was stopped out for a small gain.  The Euro and Swiss Franc trades essentially cancelled each other out.

A choppy year for the Euro.
A choppy year for the Euro.

New Zealand Dollar/Japanese Yen Donchian Breakout (NZD/JPY):

In late 2012 the Japanese Yen was extremely weak.  My two largest winning trades for 2012 and 2013 were both short Yen trades.  In early September the NZD/JPY issued a long Donchian breakout signal and I took a one unit position.  Price advanced, backed off, and now looks a little like it has just given up on doing anything (famous last words).  My hope is that the Yen will weaken and the breakout will continue up above 84.  If that doesn’t materialize, there is a sell stop in place down around 80.

The New Zealand Dollar/Japanese Yen had a nice Donchian Breakout, but now it's hovering.
The New Zealand Dollar/Japanese Yen had a nice Donchian Breakout, but now it’s hovering.

Strategy Notes:

All of the positions above are traded using a Donchian channel breakout system with a 50 day breakout for entry.  Exit is based on the greater of a 3*average true range or 25 day breakdown.  The initial position size is 1% of risk equity.  For more information on trading a Donchian channel system, check out this post.