Rule of 4 weeks trading. Richard Donchian's : The 4 Week Rule


Incorrect recognition or interpretation of trends can have a devastating effect on traders.

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Like a slow moving trading, the equity can be easily depleted without knowing what happened until the last dollar disappears from your trading rule of 4 weeks trading. Trends, however seem to carry an element of subjectivity and are well represented by the many confusing articles that seem to claim to be the authority on trends.

So how does one define a trend and why is it important to figure out the trend first?

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In the context of the currency markets, trends are nothing but the general direction in which price is developing or evolving. Obvious by the above definition, it makes logical sense to trade in the direction of the trend rather than trade against it.

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After all, which is easier? Going with the flow or against it? Going with the flow offers minimum resistance and is based on riding with the larger momentum.

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Perhaps this can be well explained by the analogy of a surfer. The best surfers tend to catch the wave and ride it. Going against the wave or the trend can be tough, disastrous.

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A trend, in the currency markets therefore is essential as it tells the trader the general direction of the markets and therefore points the trader to trade in the direction of the trend. But the next question that comes to mind is how to identify this trend. Identifying trends in the forex markets This subject has given rise to many different definitions.

By Michael Carr Updated Jun 25, Trading systems are usually thought of as complex computer programs requiring massive amounts of data to calculate the best entry and exit parameters. But in trading, often the best solution is the simplest. In fact, one of the best known trading systems doesn't even require a computer. Read on as we take a look at the weekly rule system and show you how this simple system can help you profit from a trade. Trend following is a well-known concept underlying many successful trading systems.

Some range from the very simple concepts of looking at the direction of price on the charts where an uptrend is recognized when price rises from the lower left of the corner of your screen to the upper right and vice versa. The problem with this simple definition is that the true meaning of trend is lost. Those who have read the Rule of 4 weeks trading Theory would know that trends are not constant and are in fact rule of 4 weeks trading up of primary, secondary and minor trends.

Donchian Channel: The 4 Week Rule

Therefore, when speaking of trends, the time frame is of utmost importance. With all of the subjectivity involved, it often can be difficult for traders to figure out the true trend.

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Identify trends with the 4-week rule In this article on identifying trends, we make use of a simple, well known rule developed by Richard Donchian, known for his famous Donchian 4-week rule. Based on this rule, Donchian suggested to buy when a week high is broken and to sell when a 4 week low is broken.

Full-Time Derivative Trader. Trading the markets since The 4 week rule is used primarily for futures trading but might also work in your stock trading system. The Turtles used the same strategy in the eighties.

This is perhaps the most simplest of trading strategies, which has led to other famous experiments such as the Turtle Traders. Besides this, the 4-week rule can be applied to identify trends as well.

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Without getting too much into the details, most of which can be read here on Support and Resistancewe define the criteria for the trends as follows: Up trend is where there are more higher highs and higher lows Down trend is where there are more lower highs and lower lows Referring back to the main EURUSD weekly charts, we can see how what seemed like an uptrend to the right is in fact a correction to the uptrend with the downtrend actually in play.

But first… going by traditional knowledge of trends, the chart might show that an uptrend is in play as the last lower high at 1.

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Therefore the average trader might be looking to take long positions. Sure, the long positions might work out in the short term trading time frame.

Have you heard of the four week rule?

But if you were a swing trader, things would look different. Now look at the same chart as we move forward.

The 4 week rule is used primarily for futures trading but might also work in your stock trading system. This system is simplicity at its best: - Cover short positions and buy long whenever the price exceeds highs of the four preceding full calendar weeks. This system would be continuous for our trader in that he would always have either a long or short position open.

Do you still believe this was an uptrend? Trend confirmation with Fibonacci Retracements The above chart shows clearly how what would have looked like an uptrend was in fact a mere correction. Identifying trends with the 4-week rule: Putting it together The 4- week rule is simple and objective and offers a trader, insights into the market which traditional text about trends often mistake it for something else.

If in doubt, use the Fibonacci retracement tool to measure the highest high and lowest low for added assurance.