Donchian-Channel-Trading

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Donchian-Channel-Trading

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This project demonstrates the possibility of creating a near universal trading rule set based on the Donchian channels, trend following, and an implicit application of the Kelly criterion

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"# Donchian-Channel-Trading"

Introduction

The Donchian channel is a simple trend following technique for financial trading.  The channel is defined by the max and min prices the financial product traded at for the specified days in the past, e.g. 50 days.  The basic intuition is to trade on the side of the breakouts from the window as the move signifies a potential trend about to occur or already underway.  While a breakout does not suffice to guarantee a trend in the future, a breakout is a necessary condition to the future trend.  By adding to the position on the side of the breakout, it is hoped that the trader will be on the trend when it does occur.

A naive Dochian channel's implementation, i.e. commmitting all capital in position when breakout is identified, tends to lead to large volatilities in the portfolio.  This is natural as many breakouts turn out false, and the damage done by the false signals impacts the portfolio's performance.

To smooth out the portfolio's performance and obtain better return, risk management in conjunction with the breakout signal is necessary.  Risk management includes position sizing and exit strategy.  The code here attempts to achieve both objectives by incrementally increasing the position as the breakout extends to larger time window and incrementally decreasing position when the asset reverse in pricing.

Donchian-Channel-Trading

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