Donchian breakout: buying a new 20-candle high
A Donchian breakout buys when price closes above its highest high of the last 20 candles. A fixed, volatility-based version and what to check first.
Key takeaways
- Buy a close above the highest high of the previous 20 candles, in an uptrend, on above-average volume.
- The stop and target are fixed distances: 2 ATR below and 3 ATR above the entry.
- Most breakouts fail; the rare ones that run are what the method relies on.
In this article
A Donchian breakout is one of the oldest trend-following rules there is: buy when price makes a new high for the last few weeks of candles. It does not try to predict a top or bottom. It waits for price to prove it is moving and joins in. Traders use it because it is fully mechanical and easy to test.
What a Donchian channel is
A Donchian channel, named after the trader Richard Donchian, is two lines on a chart. The upper line is the highest high of the last 20 candles. The lower line is the lowest low of the same 20 candles. Because the lines only move when a new high or low is made, or an old one drops out of the window, they look like stairs rather than smooth curves.
When price closes above the upper line, it is trading higher than at any point in the last 20 candles. The idea is that something has changed: new buyers have arrived, or old sellers are gone. The famous “Turtle” traders of the 1980s used Donchian channel breakouts as the core of their rules, which is a big part of why the method is still widely known.
Two more terms are used below. ATR (average true range) is the typical size of a candle over recent candles. Using it to set the stop and target means they stretch in volatile markets and shrink in quiet ones. An EMA (exponential moving average) is an average of recent closing prices that gives more weight to the newest candles. It is used here to define the trend on the bigger timeframe.
The rules, precisely
Traders vary the numbers, but here is one precise, testable version of this strategy, checked on 15-minute, 1-hour or 4-hour candles. It is written for a long. The short is the mirror image.
- New high. This candle closed above the highest high of the previous 20 candles.
- Bigger trend up. The next timeframe up (1h for 15m, 4h for 1h, daily for 4h) is trending up: its close is above its 20 EMA and its 20 EMA is above its 50 EMA.
- Volume. This candle’s volume is at least 1.2 times the average volume of the last 20 candles.
- Entry: at the close of the breakout candle.
- Stop: 2 ATR below the entry.
- Target 1: 3 ATR above the entry.
Unlike most setups in this series, the stop is not tied to a chart level. It is a fixed volatility distance. That makes every trade the same shape: risk 2 ATR to make 3 ATR on the first target, which is 1.5 times the risk.
Where it works
- Strong trending markets, where new highs lead to more new highs.
- The early part of a trend, after a long period of going nowhere.
- Liquid coins where a new high draws in a crowd of buyers.
- Traders who want a rule with no judgement about where levels are.
Where it fails
- Sideways markets, where every new high is quickly sold back into the range.
- Blow-off tops, where a new high is the last gasp before a reversal.
- Strings of small losses that test patience before a winning run arrives.
- Breakouts into heavy resistance just above, such as a weekly high.
What to check
- Is the 20-candle high meaningful? On a 15-minute chart, 20 candles is only five hours. A new five-hour high in the middle of a larger range is not much of an event. Check where price sits on the daily chart before treating it as a breakout.
- Is there room above? The target is 3 ATR up no matter what the chart shows. If the previous day’s high, the 7-day high or a heavy volume zone sits just above the entry, the move may stall before it gets there.
- How extended is the trend already? A new high right after a long flat period is different from the tenth new high in a row. Late breakouts in a stretched move carry more risk of a sharp pullback straight into your stop.
- Is ATR unusually high or low right now? Because the stop and target depend on ATR, a spike in volatility makes both much wider. Right after a crash or a news candle, 2 ATR may be a far bigger move than you intend to risk.
- Can the fees be justified? On 15-minute candles in a quiet coin, 2 ATR can be a small percentage of the price. Fees of 0.1% each way then take a large share of the risk. Check that the stop is wide enough in percentage terms.
- Can you stick with a low hit rate? Breakout systems often lose more trades than they win and rely on occasional large moves. If a run of losses would make you abandon the rules, size the trades smaller or skip the method.
- Did you test it on this coin? The Turtle story is about rules, not results you can expect today. Run these rules with fees over the coin’s own recent history. None of these rules is known to make money.
For the slower, longer-term version of riding trends, see trend following. For breakouts out of a tight range rather than to a new high, see squeeze breakout.
Stops, targets and the time limit work the same way for every setup in this series. See managing a setup: stops, targets and the time limit.