Richard Donchian made a trading system many years ago that was used mainly on commodities (and stocks). But with so many people now choosing to trade the forex markets, it's worth discussing how effective this system can be trading the major currency pairs.

The system itself is relatively simple. It is basically a breakout system which aims to take advantage of new 4 week highs and lows. You simply go long when a new 4 week high is made and go small (or close long positions) when a new 4 week low is made.

This does sound far too simplistic but it can really be a very profitable system. The reason why it is so effective is because these new 4 week highs or lows often mark the beginning of a new long-term trend. These trends can last several months and can yield substantial profits so they will usually cancel out many of the losing trades that turn out to be fake breakouts.

In the forex markets this system tends to work well because currencies will often trend in the same direction for several months, so this system will capture a huge slice of these trends. Another reason it works so well is that these 4 week breakouts are observed by many other traders and financial institutions all over the world. Therefore when a breakout occurs, many traders will jump on board and add momentum to this breakout, so in many ways it essentially becomes a self-fulfilling prophecy.

Plus of course in trading circles, 4 week cycles are seen to be very vital and therefore if you do see a breakout in this time frame, then it is very likely to signal the start of a new trend.

As with most systems, but, it is not perfect. You will inevitably have to endure fake breakouts on occasions and you do still need to have an exit strategy in place, particularly if the markets are stuck in a narrow trading range. A well loved exit strategy is to close your position when the currency pair makes a new 1 or 2 week low (or vice versa for a small position). This will help to contain your losses in choppy markets and yet will be sufficient to help run some of your winning trades.

Overall though the Donchian 4 week breakout system can be a profitable forex trading system. The system is so simple to follow and yet it has sound logic behind it because it aims to capture many of the long-term trends that occur throughout the year. So if you are patient enough to trade this relatively long-term system, then I suggest you at least check it out because it's worked for many traders over the years.

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