Breakout · Trend Following · 1980s · Swing / Position
Buy when price closes above its recent high, and sell when it closes below its recent low. Let winners run and cut losers fast. Richard Donchian developed the price channel decades earlier. It became famous in 1983, when traders Richard Dennis and William Eckhardt taught a version of it to a group of novices, the ‘Turtles’, and gave them real money to trade.
A Donchian channel plots the highest high and the lowest low of the last N periods. In the best-known Turtle rules, a close above the previous 20-period high is a long entry, and a close below the previous 10-period low is the exit. The short side mirrors this. Position size is scaled to recent volatility, so every trade carries a similar amount of risk. There's no forecasting involved. The system simply follows price once it breaks out of its recent range.
Price chops sideways inside a tight channel. The upper line is the highest high of the previous 20 periods, the lower line the lowest low — nothing to do yet.
Price closes above the 20-period high. That close is the entry signal — no prediction, no pattern recognition, just a rule.
The trend extends and the position is simply held. The dashed line is the 10-period low, the exit level, which trails up behind price as the trend continues.
Price closes below the 10-period low and the trade is closed. A slice of the move is given back — that's the cost of letting winners run instead of guessing the top.
Illustrative example only — not real market data.
The chart above shows one full trade: a quiet range, a close above the 20-period high, a trend that's simply held, and an exit on a close below the 10-period low. Notice how much of the top is given back before the exit triggers. That's a deliberate trade-off: it means the system never exits a big trend early just because it looks overextended.